• LEGAL ASPECTS OF FOREIGN TRADE;

THE EXPORT TRANSACTION

PREPARED FOR THE EXPORT PROMOTION BUREAU OF THE GOVERNMENT OF PAKISTAN

AND THE INTERNATIONAL TRADE CENTRE, UNCTAD/GATT, GENEVA BY ARTHUR J. DAY

COPYRIGHT © 1987 EXPORT PROMOTION BUREAU, KARACHI AND INTERNATIONAL TRADE CENTRE, UNCTAD/GATT, GENEVA

Foreword This booklet is one of a series produced by the International Trade Centre, UNCTAD/GATT, Geneva, in collaboration with the Export Promotion Bureau, Pakistan and funded by the United Nations Development Programme. Its aim is to assist the export activities of the Pakistani business community; to make them more profitable and better able to withstand the forces of an increasingly competitive international economy.

MI the texts in the series have been prepared by experts in the relevant field in collaboration with a team of authors and consultants from Pakistan and elsewhere. Allama Iqbal Open University, Islamabad, has provided helpful support and advice without which the project could not have proceeded. The booklet is also to be used for their diploma course on Export Management.

The main contributor to this book was Arthur J. Day, Managing Director, The Developing Countries Trade Agency, London.

• Although every effort has been made to ensure that the information given in this distance teaching book is accurate, no legal responsibility is accepted by the author, the Developing Countries Trade Agency, or the International Trade Centre UNCTAD/GATT, Geneva, for any errors in or omissions from the editorial content

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Contents

1 Introduction 5

2 Distribution in international trade 8 2.1 The export salesman 8 2.2 Agents 9 2.3 Distributors 13 2.4 Specimen agreements 16 2.5 Selection of agents or distributors 22 2.6 Summary 23 2.7 Other forms of distribution 23 2.8 Summary 26

3 International contracts of sale 28 3.1 The contract 28 3.2 Other contract elements 29 3.3 The passing of property 30 3.4 The passing of risk 32 3.5 Other aspects of international sales contracts 33 3.6 Summary of contract of sale 35

4 Delivery 38 4.1 Use of Incoterms 39 4.2 Using Incoterms as a marketing tool 39 4.3 Incoterms as a contractual condition 39 4.4 The Incoterms 40 4.5 Relating modes of transport to the appropriate delivery terms 46

5 Export finance 48 5.1 Methods of payment 48 5.2 Summary 53

6 The documentation of international trade 55 6.1 A step-by-step guide to export documentation 55 6.2 Summary 61

7 Cargo insurance 65 7.1 Fundamental principles 66 7.2 Cargo insurance and bankers' documentary credits 67 7.3 A final point 67 7.4 Summary 68

8 International transport 69 8.1 Sea transport 69 8.2 Air transport 71 8.3 Road transport 73 8.4 Rail transport 74 8.5 Containerisation 74 8.6 Post 74 8.7 Summary 75

9 Other legal aspects of the export contract 77 9.1 Arbitration v. litigation 77 9.2 Protection of indusuial property 78 9.3 Product liability 78

10 Some recommended publications 80

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1 Introduction In this book I propose to consider what you, the exporter, should know about trade law - the trade law of your own country, Pakistan, and international trade law. You should also bear in mind that forms of law differ the world over. English law (common law) differs from some Continental law (Roman law) and both differ from forms of Religious law. What is more, in certain economic areas, the European Economic Community, for example, there are laws to which all Member States adhere. An instance of this is that, in the EEC, the Treaty of Rome lays down rules regarding competition and companies having 'dominant positions in the market-place'.

The important thing for you to remember is that if you act honestly, keep to the terms agreed within your contracts of sale, and know the contents of this book, you should not have any trouble.

An extension of this thinking is that it is always more satisfying, commercially preferable and cheaper to compromise with your buyer at times of dispute rather than go to law. Far better to placate than litigate or arbitrate.

Let me assure you straight away that you will not be expected to be as accomplished in the subject as an international trade lawyer. However, a basic knowledge of law up to the law of contract would help you work professionally and successfully with your customer abroad. This knowledge must then be extended into your export operation: into

• Foreign representation (agency) • Sales • Delivery • Export finance • Documentation • Cargo insurance, and • International transport.

Additionally, you must be aware of the differing, advantages of arbitration, in which experts in your own field can decide disputes, and litigation, in which you seek the resolution of disputes in the courts. You should know what you can do about trade marks, patents and copyright (technically, the protection of your intellectual and industrial property rights). And, if anything goes wrong with your products when being used by the final buyer or consumer, you should know whether you are still responsible for any damage arising (the concept of product liability).

I am not an international trade lawyer, not legally trained at all in fact. However, I have been involved with international trade for nearly 45 years as exporter, researcher, Director General of the British Institute of Export, and consultant. I merely find facinating the situation of an exporter who deals with a customer in another country, who probably speaks a different language uses a different currency, operates under a different legal system and probably uses different weights and measures.

Think about these things for a moment:

• If both you and your customer each operate under a different legal system, which particular system will control the operation of your contract?

• As you are in business for profit, you should know of any international agreements regarding methods of payment in export trading. Do you?

• It's not as easy as it sounds, is it? But, used intelligently, even the knowledge of international trade law which you will derive from this small publication will help to keep you free of disputes - and consequently save you the expense of arbitration or litigation. What is more, you will be in a position to prepare your own contracts and

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agreements for vetting by your professional legal adviser and thus also save considerable legal fees. You, as an export executive, must study law in order to keep away from it.

This may need some explanation. Take sales, for example. The following true story illustrates the necessity for contractual agreement

A consultant in a developing country was asked to assist the export marketing department of the local export promotion office in connection with obtaining payment for several export consignments despatched from the same exporter to the same customer. Payments were long overdue. The consultant asked to see the contract. No contract had been signed. He then asked to see the relative correspondence. No letters had been exchanged. 'How', he asked, 'were the orders obtained?' Oh% was the reply, 'somebody just telephoned and said they were repeat orders!' No payments were ever received.

• In your international trading you will probably find it of considerable value and convenience to have somebody representing you in the foreign market-place. The term 'agent' is frequently used for such a purpose, but, in practice, it is used very loosely, usually as a generic description for any person or organisation undertaking any form of representation. You, as a well-informed exporter, must appreciate that, for example, there are essential differences between agents and distributors. You must select the type of representative appropriate for your own operation.

What type of representation are you currently using? It would be wise to consider your present situation before we consider the subject of 'Distribution' in the next section.

• You probably know from experience that 'delivery' can often be a cause of fundamental disagreement between a seller in one country and a buyer in another. Who is responsible for transport, insurance, packing, etc? Where does delivery take place? When does the risk in the goods pass from you to your customer? And, all importantly, when does ownership of the goods pass to the buyer? Fortunately, there is a simple solution: a form of universal delivery code which we will consider in Section 4.

• Like all good traders, you are no doubt very interested in security of payment. With customers sometimes several thousand miles away, this can cause problems if you are not acquainted with the work of the International Chamber of Commerce (ICC). The ICC's publications do not, of course, constitute law in themselves, but as a result of their contents sometimes being adopted contractually by traders, they can obtain the force of contractual responsibility.

How do you currently arrange payment to ensure that you receive the money when it is due?

• Like 'many other exporters', you no doubt find the documentation of international trade both complex and banal. National requirements the world over, however, call for adherence to specified paperwork to enable goods to be admitted into their countries. Inaccurate and incomplete documentation invariably results in unnecessary costs and reflects badly upon your export department. Customer relations are harmed and the increased costs will reduce your profits.

• As far as cargo insurance is concerned; it can safely be said that until the United Nations Conference on Trade and Development criticised the traditional forms of marine insurance contracts in use throughout the world back in 1978, those contracts were virtually incomprehensible to everyone except brokers and underwriters. If you were exporting in those days, you will know what I mean. Legislation over a couple of centuries had caused amendment after amendment and the result was that traders found interpretation impossible. New forms of contract have changed matters considerably.

• In the world of international transport - the carriage of goods by sea and air, for example - it is obviously impractical for shipowners and aircraft operators to negotiate individual contracts on each sailing or flight. Your interests as a trader are protected,

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however, for transport operators have to abide by international conventions which are adopted into national legislations by statutes. But here you will have to be somewhat cautious. Your carrier's responsibility will be in accordance with the 'law of the contract' for that will be the law under which the transport will operate. If you have a bill of lading handy, have a look at the terms of the 'contract of affreightment' printed on the back.

I shall return to all these points under the various headings in the following sections and will endeavour to make the importance of legal understanding obvious - and hopefully make the subject interesting in the process.

Before continuing, however, I have listed here some common problems of international traders which can be avoided by applying the advice contained within these covers.

• Goods are sold by sample yet contract deliveries are not up to the same standards as the sample.

Goods supplied are not in accordance with contract of sale description.

• Incorrect documentation supplied by the exporter causes delays in importation and payment difficulties.

• Goods are not delivered at contractually-promised times.

• Delivery terms, such as FOB, are frequently unaccompanied by details of where the delivery will be made, e.g. FOB (Karachi).

• Delivery terms for goods shipped in conventional vessels and delivery terms for goods sent in container ships vary, but this is rarely appreciated.

• Exporters are frequently unaware of the value of carriers' liability to shippers in the event of carrier negligence, and occasionally lose money because of this.

• In addition to exporters' liability for insuring against loss of or damage to goods in transit under specific delivery terms, there are times where it is prudent for exporters to insure, although they are not contractually required to do so.

• The terms and conditions of bankers' documentary credits have to be adhered to meticulously. Alas, 50% of credits are not paid in accordance with prescribed banking practice because of exporter mistakes. More delays and expense!

• Whereas most exporters speak loosely of their foreign representatives as 'agents', few seem to know the precise difference between agents and distributors.

Read on and ensure that you are not one of the exporters who lose money because of lack of professionalism.

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2 Distribution in international trade I suggested in the introduction that it would be useful if you examined your representation in the foreign markets to which you sell. •There are several ways of organising distribution abroad and no doubt you are using one or several of the following options:

By Company technical specialist export salesmen who must be well-versed in the intricacies of international trade. -

By Agents whose services are bought. In this arrangement you will be in direct contractual relationship with your foreign customer.

By Distributors to whom you sell your goods directly and who resell them to the ultimate customers in the territories they cover.

By your own field organisation. Here you attach your technical salesmen to your agents or distributors.

By the establishment of your own branch (not an incorporated body) in the foreign market-place, if this is permitted.

By the formation of, purchase of, or merging with a company within the foreign country (multinational trading).

The topic of distribution is covered in fuller detail in Robert Hartley's book in this series, Export Channel Management.

ACTIVITY 1 At this stage it would be useful for you to investigate exactly how your company sells or would propose to sell to customers in foreign territories. Prepare a list of the types of customer contact relationships your firm has or proposes to have.

I shall now examine each of the types of distribution or customer contact relationship mentioned above and deal with any legal or other specialised aspects of each. Think about your own arrangements as you read and consider whether or not they are the most suitable for you. Are you carrying out these arrangements correctly?

2.1 The export salesman

The simplest form of distribution, of course, is the company technical specialist export salesman. As this is the type of customer contact that the firm new to export trading invariably uses, I suspect that your firm has had or is having experience in this area. Perhaps you are one such specialist salesman and this is the reason for your studying this course. If that is the case, you should be applauded, for there are fundamental differences between domestic and export salesmen, and knowing something about this subject is one of them.

Both domestic and export salesmen have to possess extensive product knowledge and sales expertise but the export specialist must also be well versed in all aspects of export practice, authorised to make decisions on the spot (sometimes thousands of miles from

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head office) and, consequently, be briefed on company policy on pricing, credit periods, product adaptation, delivery, and all contractual conditions peculiar to international sales. The export salesman is the company's ambassador abroad.

A modern development in the appointment of company export salesmen is the use of nationals of the countries in which the firm intends to trade. This is because many business people prefer to deal with their own countrymen rather than foreigners. There are never any language problems, for example. And, there are economies, for such nationals frequently work from their own homes. The French are a good example. My understanding is that a typical French company would far rather buy from a French salesman than a visiting foreigner.

Has your firm considered this practice?

2.2 Agents

As I stated earlier, there is often confusion in exporters' minds about how agents differ from distributors. The essential difference has been succinctly explained by the renowned international trade lawyer Professor Clive Schmitthoff as follows: The expression "agent" is often used loosely in commercial parlance. It is often used to refer to what the lawyer would call an export distributor. The difference is this: in the agency relationship the principal is brought into direct contractual relation with the foreign customer, to whom the lawyer refers as the third party. In the export distribution agreement, on the other hand, the exporter sells his goods to the foreign representative who, in turn, resells them to the customer in his country. In other words, in an export distribution agreement there exist two consecutive contracts of sale and the exporter is not normally in a direct relationship with the foreign customer. The loose commercial use of the term agent is understandable because both arrangements, that of export distributorship and agency in its proper legal sense, can be made exclusive, by giving the representative an exclusive territory in which he has sole rights of transacting business for the exporter. Nevertheless, the distinction is of great legal importance.' (From 'Agency in the Export Trade', published in Export, the journal of the Institute of Export, July 1970.)

So you sell through an agent, not to him. This very statement should give you considerable food for thought. Selling through an agent should suggest to you a number of associated situations which arise if you decide to appoint one.

ACTIVITY 2 Before continuing, try to assess, as a managerial exercise, the results of operating via such intermediaries. What are the advantages and disadvantages of this method, do you think?

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As you have no doubt now discovered, there are at least two distinct advantages and two possible disadvantages in an agency relationship over other forms of distribution.

Advantages: You, as an exporter, will have numerous clients recommended by the agent, which will mean that you have a large number of small credit risks - not one major credit risk. Although there is much more work involved in checking the credit status of a number of buyers, it is far better, if problems arise, to lose a smaller amount of money that is owing from one small buyer than all the money owing from all buyers in a given territory, as might be the case with a distributor in financial difficulties (see later in this chapter). Secondly, as you will be operating under an agency agreement, which we will consider shortly, you can have effective control over sales policy.

The disadvantages are significant. Firstly, because you are trading in the foreign market by selling through a resident agent you may create a liability for local taxation. Secondly, because of the general acceptance of the fact that what an agent says, does, promises or undertakes, you have done this too, then if the agent strays outside the limits of his authority, you could be bound by his action. There are ways to bind the agent to the authority you give him. Read carefully the specimen agreement accompanying this chapter and perhaps use this as a basis for your own agreements. -

Laws relating to the use of nationals as agents for foreign companies tend to differ in most countries of the world. I recall a case of a British exporter who appointed an agent in another country. He found that when he wanted to dispense with the agent's services he was not only unable to do so but discovered that he would have to provide the agent with a pension at the end of his agency life as well!

What is the Pakistani law regarding operating as an agent for a foreign firm? When you discover that your own country has regulations regarding Pakistani organisations operating on behalf of foreign exporters, you will readily understand that other countries have such regulations, too.

The agency agreement

Your relationship with an agent in a foreign territory will be defined in an agency agreement. It is always difficult to get legal advice from chambers of commerce or trade associations. This is usually for two reasons. Firstly, there are established ethics in the legal profession which tend to indicate that legal advice must come from legal sources (and be paid for!). Secondly, chambers of commerce, trade associations and the like are always wary of becoming legally implicated. Thus you should prepare your agency agreements as recommended in this chapter and then get them approved by your legal advisers. And try to be sure that your lawyers specialise in international trade practice. Not all lawyers do.

Regardless of residence of your agent and the varying legal systems under which both you and he operate, you must ensure that the aspects of his agency set out in the checklist below are fully covered in your agreement.

Checklist for an agency agreement

• A probationary period during which you will have opportunity to assess against targets the agent's worth in practice (usually referred to as 'the honeymoon period). The period to be agreed will vary according to the product but, in my opinion, one year is a practical recommendation.

• The duration of your agreement after any satisfactory probation period. As already inferred, this is particularly important as some legal systems have much to say on this in order to protect their nationals' interests.

• Details of your goods to be sold and an agreement regarding goods of a competitive type being handled by the agent

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• The agent's territory.

• Agreed commissions which you will pay; the price upon which this will be determined; when the commission is earned; when the commission will be Paid; the currency of the commission payment; and the method of payment

• Reservation of property in the goods despatched to your agent until you have received the purchase price from the agency-introduced customer.

• Secrecy in connection with confidential information and protection of your brand names, patents and trade marks.

Expenses for the promotion of your products.

• Your agent to use reasonable diligence and care in promoting your goods.

• The agent's responsibilities to you in the event of losses due to his own performance.

• The agent's duty to disclose all facts relevant to the business he introduces to you.

• The agent to maintain proper records of account concerning the business between him and yourself as his principal.

• Orders received from companies within your agent's territory but not directly from the agent.

• Repeat orders received directly by you from foreign principals introduced originally by the agent.

• Your own discretion to accept or reject orders.

• A choice of law or arbitration clause in the event of any dispute arising during the existence of or at termination of the agreement.

• A termination of agreement clause.

• The duty of the agent to pass on all documents relating to your relationship on termination of the agency agreement

ACTIVITY 3 If your company's agency agreements are available to you, examine them to see whether or not all the above points have been covered. Compare them with the specimen agency agreement published in this section.

Helpful publications

Two booklets are available on the subject of Agency which will be of invaluable assistance to you in the preparation of your agency agreements.

The first is Agency Agreements in the Export Trade by C.M. Schmitthoff and published by the Institute of Export in the United Kingdom (see Section 10). The booklet contains, amongst other things, the specimen agency agreement and specimen del credere agency agreement which are reproduced on pages 16-21. The latter form of agency will be explained shortly when I define various types of agency in the export trade.

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The other publication is Commercial Agency, Brochure No.410 of the International Chamber of Commerce (ICC). You can obtain this from the Pakistan National Committee of the ICC which is at: 10th floor, Adamjee House, LI. Chundrigar Road, Karachi (Telephone: 222655 (five lines); Telex 25770 GVTC PK). This is a simple checklist for principals and agents when they are negotiating and drafting agency agreements. Both publications are relatively inexpensive.

Types of agent

In the course of mentioning some helpful publications I referred to a form of agent known as a del credere agent Such an agent is one who accepts responsibility for payments for all the business he introduces to you, regardless of such incidences as bad debts brought about by buyer insolvency and the like. Naturally, for accepting such a responsibility he expects a higher commission than a normal agent because of the greater risk he runs.

You will find other forms of agent, too, in your international trade experience:

A mercantile agent is an agent entrusted with a store or consignment of your goods and who has authority to supply customers directly from stock.

An agent of necessity calls for some explanation. If an agent is authorised to hold stocks of your goods but only to sell them when authorised to do so, there may be problems. Thus the agent is permitted to sell your goods from stock without your permission in cases where the goods would deteriorate in the time required to obtain permission. This is the action of an agent of neressity.

An exclusive agent is an agent who poscrsves sole rights for the sale of your goods in a defined territory.

Then, of course, there is the well-known forwarding agent whose services you may regularly use already. Forwarding agents are not within the family of agents we have considered above. They are usually companies employed either by you or your buyer (depending upon the terms of sale which we shall discuss in ensuing chapters) to assist with the transport, packing and insurance of the goods between the place of despatch and their destination. Forwarding agents are rarely involved in the sales aspects of international transactions.

Summary

These are the major points on agents. Read them and be sure you understand them.

• An agent is an intermediary through whom you sell. He is never a party to your contracts of sale.

With an agent you have many small credit risks rather than one large one.

• Using an agent means retaining effective control over your sales policy.

Selling through an agent may create a liability for tax in the agent's country.

• Under what is generally accepted as agency law, what your agent says, does, promises or undertakes, you have said, done, promised or undertaken.

• It is of crucial importance to ascertain the regulations regarding the use of nationals as agents of foreign companies in the countries to which you wish to export, particularly regarding the terms of agent employment

Use this chapter to prepare your agency agreements and then get them approved by your legal advisers.

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2.3 Distributors

From what we have already discussed you will know that an exporter sells through an agent but to a distributor. In Professor Schmitthoffs explanation you will recall that 'in the export distribution agreement.. the exporter sells his goods to the foreign representative who, in turn, resells them to the customer in his own country'.

As with agents, there are advantages and disadvantages in adopting a distributor as a foreign market repesentative. You will recall the situation with agency representation.

ACTIVITY 4 Just as you did with the agency situation, before continuing, try to assess the advantages and disadvantages in the employment of a distributor in a foreign market, rather than an agent.

Whether you regard it as an advantage or a disadvantage, a distributorship permits you to have only one - albeit large - credit risk in the market A disadvantage is that if anything goes wrong financially the loss could be high. Advantages are that a single financial status is not difficult to ascertain and monitor, and if a credit insurance service is available to you, the risk can be adequately covered.

(There is an official export credit insurance service available to you in Pakistan. The Export Promotion Bureau can provide you with advice on these matters.)

The very obvious advantage to you of using a distributor is that you have but one customer in the market-place with whom it should be easy to establish a friendly, effective and profitable relationship. You should be able to develop an understanding from which the commercial association should operate like clockwork. Another advantage is that you will not be involved in taxation in the foreign country.

However, there are distinct disadvantages. If you are going to work with only one company in a given area, the amount of business which you are going to accomplish will inevitably be constrained by the liquid capital of that company. When that is fully extended, what are the possibilities that you will have to consider?

There are basically four In the first place, you can consider giving your distributor longer and/or larger credit. Secondly, you could put up with a situation in which you are not enjoying as much business as you could obtain; this might not, however, be in line with your objective of maximising profits. Thirdly you could, of course, operate by 'selling on consignment' (consignment stocks are not paid for until they are sold in the market-place). Fourthly, and this would mean an adjustment of your distribution agreement, you could, by agreement, reduce your distributor's territory to one he can manage efficiently.

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Selling to a distributor can also mean that you, the exporter, will have less effective control over the sales situation than is the race with an agent and be less able to conduct the sales policy which you have decided on. You might wish to sell certain products which give you a greater return whereas the distributor, as your customer who is selling onwards to other buyers, will want to concentrate upon products which give him the greatest return.

Distributors are given a discount or allowed to make their own profits. Questions of local 'resale price maintenance laws' ('fair trading laws', 'anti-trust provisions', etc.) must be considered if the discount is granted off a 'fixed price'. There are important implications on the 'value for duty' in such cases, but there is no good reason in law why a distributor should pay less import duty on similar goods than anybody else would.

Distributors are, in fact, exclusive or privileged import merchants. In consideration of their looking after your interests and building up your sales you give them either the sole right to buy from you for resale in a specified market, or you sell to them on more favourable terms than you are prepared to give to other people.

The key issue is that distributors buy your goods, i.e. purchase title to your consignments. Agents, on the other hand, merely introduce customers who themselves purchase your goods.

The distribution agreement

The relationship between you and your distributor will be reflected in the invoices submitted by you for the direct supply of gooels. These will be in accordance with your distribution agreement which will follow similar lines to those listed for an agency agreement. The agreement will consider the following:

Checklist for a distribution agreement

• A probationary period during which you will have opportunity to assess against targets the distributor's worth in practice (usually referred to as 'the honeymoon period). The period agreed will vary according to product but, in my opinion, one year is a practical recommendation.

• The duration of your agreement after any satisfactory probation period.

• Details of goods or services to be purchased and an agreement regarding your distributor handling goods of a competitive nature.

The quantities of goods or services to be purchased.

• The terms of their delivery.

• The distributor's territory.

• Prices of goods to your distributor and agreement on resale and retail prices in the market-place.

• Method of payment by distributor to you.

• Reservation of property in the goods despatched to your distributor until you have received the purchase price from him.

• Secrecy in connection with confidential information and protection of your brand names, patents and trade marks.

• Agreement on expenses for the promotion of your products.

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Your distributor to use reasonable diligence and care in promoting your goods.

• The distributor's responsibilities to you in the event of losses due to his own performance.

• Orders received from companies within your distributor's territory but not directly from your distributor.

• Your own discretion to accept or reject your distributor's orders.

• The holding of spare parts.

• Agreement regarding the appointment of retail organisations selected to sell your products to consumers in the distributor's territory.

• A choice of law or arbitration clause in the event of any dispute arising during the existence of or at the termination of the agreement.

A termination of agreement clause.

• The duty of the distributor to return all confidential and technical information about your products on termination of the distribution agreement.

ACTIVITY 5 As with agency agreements, if your company's distribution agreements are available to you, examine these, too, to see whether or not the relevant points are all covered. Compare them with the specimen Distribution Agreement in this chapter.

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SPECIMEN AGREEMENT i An Agency Agreement

AN AGREEMENT made this day of 19 BETWEEN whose Registered Office is situate at

(hereinafter called "the Principal") of the one part AND

(hereinafter called "the Agent") of the other part.

WHEREBY IT IS AGREED AS FOLLOWS: 1. The Principal appoints the Agent as and from the

to be its sole Agent in (hereinafter called "the Area")

for the sale of manufactured by the Principal and such other goods and mer-chandise (all of which are hereinafter referred to as "the goods") as may hereinafter be mutually agreed between them.

2. The Agent will during the term of years (and thereafter until determined by either party giving three months' previous notice in writing) diligently and faithfully serve the Principal as its Agent and will use his best endeavours to promote the sale of the goods of the Principal within the area and will not do anything that may prevent such sale or interfere with the development of the Principal's trade in the area.

3. The Agent shall not offer to sell or negotiate the sale of any of the goods to any person, company or firm residing outside the area, nor shall he knowingly offer to sell or negotiate the sale of any of the goods to any person, company or firm residing within the area with a view to their exportation to any other country or area without the consent in writing of the Principal had and received.

4. The Agent shall not during the continuance of the Agency hereby constituted sell or offer to sell or negotiate the sale of goods of a similar class or of such kind as would or might com-pete or interfere with the sale of the Principal's goods either on his own account or on behalf of any other person, company, or firm whomsoever without the consent in writing of the Principal had and received.

5. (a) In all negotiations with prospective customers the Agent shall disclose that he is acting as Agent of the Principal.

(b) Upon receipt by the Agent of any order for the goods the Agent will immediately transmit such order to the Principal who (if such order is accepted by the Prin-cipal) will execute the same by supplying the goods direct to the customer.

(c) The Agent shall not have the right to bind the Prin-cipal to any contract and any orders taken by the Agent shall not be binding on the Principal unless accepted by the Principal by written confirmation to the customers.

(d) The Principal will have the right to refuse to accept .or execute any order obtained by the Agent or any part thereof without assigning any reason for the said refusal and the Agent shall not be entitled to any commission in respect of any such refused order or part thereof so refused.

6. The Agent undertakes to assign to the Principal if called upon so to do any rights acquired by the Agent against a customer in respect of a transaction negotiated on behalf of the Principal.

7. (a) The Agent shall not in any way pledge the credit of • the Principal or hold himself out as having the right to pledge the credit of the Principal. The Agent shall not make any representation or give

(b) any warranty or guarantee in respect of the goods without the authority in writing of the PrincipaL

(c) The Agent shall not give credit to or deal with any person or firm which the Principal shall from time to time direct him not to give credit to or deal with.

8. The Principal will from time to time furnish the Agent with a statement of the minimum prices at which the goods are respectively to be sold and the Agent shall not offer to sell or negotiate the sale of such goods below such minimum price but shall endeavour in each case to negotiate the best price obtain-able.

9. All orders shall be negotiated by the Agent on terms C.I.F. )/F.O.B. (

with payment against documents by irrevocable and confirmed letter of credit given by Bank (or such other Bank as may be approved by the Principal in

• writing), payable to the Principal's Bank, Bank, London.

10. (a) The Agent shall keep an account of all orders obtained by him and will every three months send a copy of such account to the Principal.

(b) Upon execution of any order transmitted by the Agent to the Principal the Principal will forward to the Agent a duplicate copy of the invoice sent with the goods to the customer and in like manner shall from time to time inform the Agent when payment is made by the customer to the Principal.

2.4 Specim

en agreem

ents

11. The Agent is not authorised to accept any money on behalf of the Principal nor to enter into any compromise or agreement with any of the Principal's customers.

12. The Agent shall not enter into any contract or incur any debt or other obligation on behalf of the Principal unless pre-viously specifically so authorised in writing by the PrincipaL

13. .The Agent shall not perform or offer to perform any after sales services for customers who have purchased any of the said goods.

14. (a) The remuneration of the Agent shall be a commission of per cent on all moneys received by the Principal as purchase price in respect of all orders obtained direct by the Agent in the area which have been accepted and executed by the Principal. The said commission shall be based on the C.I.F. invoice value of the goods. The Agent's rights to receive a commission in respect of any such order shall not accrue until all moneys representing the purchase price have been received by the Principal.

(c) The said commission shall become payable one month after receipt by the Principal of the said moneys from the customers.

(d) The Agent shall bear the cost of all his expenses.

15. The Agent shall be entitled to commission on the terms and conditions mentioned in clause 14 (a) (b) and (c) hereof on all export orders for the goods received by the Principal through export merchants, indent houses, branch buying offices of cus-tomers, and head offices of customers situate in the United Kingdom of Great Britain, Northern Ireland and the Republic of Ireland for export into the area. Export orders in this clause mentioned shall not include orders for the goods received by the Principal from and sold delivered to customers' principal place of business outside the area although such goods may subse-quently be exported by such customers into the area, excepting where there is conclusive evidence to satisfy the Principal that such orders although not transmitted to the Principal through the Agent are directly resultant from work done by the Agent with the customers.

16. A certificate signed by the Principal's accountants shall be conclusive evidence of the amount of commission payable by the Principal to the Agent and shall be final and binding on the parties herein.

17. (a) Any indulgence granted by the Principal to the Agent in respect of the performance by the Agent of his obligations hereunder or any neglect or failure by the Principal to enforce any of the terms hereof shall not be construed as a waiver or variation of or other-wise prejudice any of the Principal's rights under this Agreement.

(b) No variation of this Agreement shall be of any effect unless made in writing and signed by the Principal and by the Agent.

IS. This Agreement is personal to the Principal and the Agent and may not be sub-contracted or assigned by either party.

19. (a) This Agreement shall be governed by and construed in accordance with the laws of England.

(b) Any dispute that may arise out of or in connection with this Agreement, including its validity, construc-tion and performance. shall be determined by arbitra-tion under the Rules applicable to non-domestic arbitrations of the London Court of Arbitration at the date hereof. which Rules, with respect to matters not regulated by them incorporate the UNCTTRAL Arbitration Rules. The parties agree that service of any notices in reference to such arbitration at their addresses as given in this Agreement (or as subseouently varied in writing by them) shall be valid and sufficient.

AS WITNESS the hands of the parties hereto the day and year first hereinbefore written:

(Signatures)

(b)

SPECIMEN AGREEMENT 2: A Del Credere Agency Agreement

AN AGREEMENT made this 19 BETWEEN whose Registered Office is situate at

"the Company") of the one part AND

"the Agent") of the other part.

WHEREBY IT IS AGREED AS FOLLOWS: I. The Company hereby appoints the Agent as its del credere

sole agent for the sale in (the territory) of (the goods) and the Agent accepts the appointment on the terms hereinafter defined.

2. This agreement shall come into operation as from and shall continue in force for one

year certain and thereafter until terminated by either party giving to the other calendar months' notice in writing expiring on any date provided always that either party may determine it summarily if the other party fails to carry out the terms of the agreement, or goes into liquidation other than voluntarily for the purpose of reconstruction, or is wound up, or makes a composition with his creditors.

3. The Agent shall at all times use his best endeavours to develop the sale of the company's goods the subject of the agency within the territory and undertakes not to sell, or offer for sale, any goods which the company considers to be in competition with its own goods the subject of this agreement.

4. The Agent shall not solicit orders for the goods from any person, company or firm residing outside the territory nor shall he establish or maintain a distribution office outside the territory for the purposes of selling the goods there.

S. The company shall be free to sell the aforesaid goods with-out the territory of the Agent and shall not be obliged to pay commission to the Agent on goods shipped into the said territory unless sold by the Agent.

6. The Agent shall offer the goods for sale as goods manu-factured by the company and according to the specifications supplied by the company to the Agent from time to time either generally or as applicable to a particular case and the company will hold itself responsible to any purchaser of the goods through the Agent for the fulfilment of any such specifications but save as aforesaid the Agent shall not (except with the prior consent in writing of the company) when offering for sale the goods give any warranty of fitness of the goods for any particular purpose.

7. The company shall ship on consignment reasonable quan-tities of the goods to the Agent against indents. All such goods on consignment together with the necessary containers shall remain the absolute property of the company until delivered to the buyer under safe contract. The Agent shall pay landing charges, duty, cartage, warehousing costs and insurance on account of the company and shall recover these by debiting the company in current account.

8. Such consignment stocks shall be held in (place within territory) to order of the

company by (warehousing company) for release to purchasers against delivery orders signed by the company and countersigned by the Agent.

9. The Agent undertakes that no charge, or lien shall be created on the goods so consigned.

10. (a) The Agent agrees not to offer the products for sale at prices below the minimum prices as set out in the company's price list for the time being in force for sales within the territory and will not offer a prospective purchaser more favourable terms than those currently prescribed by the company.

(b) The Agent shall have the right at his absolute dis-cretion to offer the products for sale at prices in excess of the minimum prices set out in the company's price list and upon payment for deliveries at overprice shall be entitled to one half of such overprice.

11. As consideration for the Agent's services hereunder the company shall pay the Agent commission at the rate of per centum which shall be calculated on the C.I.F. invoice value of all goods sold in the territory by the Agent.

12. (a) The Agent shall undertake del credere responsibility in respect of every sale by him of the company's goods.

(b) In respect of all such sales the Agent hereby agrees to indemnify and keep indemnified the company against all loss (or loss up to per cent) caused by the failure on the part of any purchaser to pay the whole or part of the purchase price where such failure arises out of the purchaser's insolvency or inability to pay.

(c) The company agrees to pay the Agent del credere commission at the rate of per cent on the terms provided by paragraph 11 hereof.

13. in the event of any dispute concerning the amount of any commission due or payable by the company to the Agent under this agreement a certificate as to the amount signed by the auditors for the time being of the company shall be conclusive or binding on both parties.

day of

(hereinafter called

(hereinafter called

14. The Agent undertakes not to pass on to the buyer any part of his commission, but may divide it with his appointed distributors where he can control their selling prices.

15. The Agent shall keep and maintain proper books of account and shall remit quarterly to the company statements and the sterling equivalent of the net proceeds of sales of the goods which have been made by him subject to retention by him of the commission provided for in clauses 11 and 12 hereof and those charges payable by him under clauses 7, 16 and 17 and properly to be debited to the company.

16. Each of the parties hereto shall bear his own expenses other than those specifically payable by the other except that charges incurred by the Agent for cables and telegrams properly dispatched in the conduct of the business shall be refunded to him by the company.

17. Sales literature shall be supplied free to the Agent by the company and a reasonable allowance for advertisement and propaganda to be mutually agreed upon shall be paid for by the company.

18. The Agent shall be free by nameplate at his office, or on his letter-heading or in other manner approved by the company to inform the public that he is the sole agent in the territory of the company during the continuance of this agree-ment.

19. (a) Any indulgence granted by the company to the Agent in respect of the performance by the Agent of his obligations hereunder or any neglect or failure by the company to enforce any of the terms hereof shall not be construed as a waiver or variation of or otherwise prejudice any of the company's rights under this agreement.

(b) No variation of this agreement shall, be of any effect unless made in writing and signed by the company and by the Agent.

20. The validity, construction and performance of this Agree-ment shall be governed by the law of England and any dispute that may arise out of or in connection with this Agreement, including its validity, construction and performance, shall be determined by arbitration under the Rules applicable to non-domestic arbitrations of the London Court of Arbitration at the date hereof, which Rules, with respect to matters not regulated by them. incorporate the UNC11 RAL Arbitration Rules. The parties agree that service of any notices in reference to such arbitration at their addresses as given in this Agreement (or as subsequently varied in writing by them) shall be valid and sufficient.

AS WITNESS the hands of the parties, etc.

SPECIMEN AGREEMENT 3: A Sole Distributor Agreement

AN AGREEMENT made this day of 19 BETWEEN whose Registered Office is situate at

"the Company") and (hereinafter called "the Distributors").

WHEREBY IT IS AGREED AS FOLLOWS: 1. The Company hereby appoints the Distributors to be its

sole Distributors of (hereinafter referred to as "the Goods") throughout (hereinafter referred to as "the Territory").

2. The Distributors agree to purchase from the Company and the Company agrees to sell to the Distributors every year during the currency of this Agreement the Company's goods to the value of per annum, such goods to be ordered by the Distributors in instalments according to their discretion, each instalment indicating the specifications, quantities and other details of the ordered goods. Each instalment order shall be deemed to be a separate contract.

3. The instalment orders referred to in the preceding para-graph shall be invoiced by the Company on an F.O.B. [insert name of port] basis, plus the charges for freight and insurance, which charges shall be for the account of and to be borne by the Distributors.

4. Unless otherwise agreed in writing, payment for the instalment orders referred to in paragraph 2 hereof shall be made by the Distributors for each individual instalment order by means of an irrevocable documentary credit, confirmed by a clearing bank in the United Kingdom, and opened for the Company as beneficiary.

5. The Distributors will during the term of years and thereafter from year to year until terminated by (three) months' notice in writing given by either party hereto to the other and subject to the power of summary determination by the Company hereinafter contained diligently and faithfully serve the Company using their best endeavours to promote and extend the sale of the goods of the Company within the territory and will not do anything that may prevent such sale or inter-fere with the development of the Company's trade in the territory.

- 6. The Distributors shall not solicit orders for the goods from any person, company or firm residing outside the territory

(hereinafter called

nor shall they establish or maintain a distribution office outside the territory for the purposes bf selling the goods there.

7. The Distributors agree not to engage in selling, factoring or otherwise being concerned in the promotion or sale of goods competing with or in the same class of merchandise as the goods of the Company provided always that the Distributors shall be at liberty to engage upon the sale of similar goods obtained from other suppliers where it shall be proved to the reasonable satisfaction of the Company that such similar goods are not competitive with the goods of the Company.

8. [Save as provided in clauses , hereof] the Company agrees not to sell the goods to any other person, company or firm in the territory. The Company further agrees to refer all inquiries for the goods reaching it from the territory to the Distributors.

9. The Distributors agree to prepare a schedule of cost insurance freight landed duty paid prices resale prices to retail traders and fixed retail list prices for sale to the public by retail traders in the territory and to submit the schedule to the Com- pany for approval within weeks of the commencement of this Agreement and agree not to sell the goods at prices other than those set out in that schedule as so approved (or as may be altered by agreement between the parties from time to time) without the written consent of the Company.

10. The Distributors agree not to act in the name, for, or on behalf of, the Company and not to bind the credit of the Company in any way and not so to act as to compromise the credit of the Company and to undertake no guarantee or warranty in respect of the goods except as shall previously have been authorised by the Company in writing and in all matters of trade or technical description shall faithfully follow such description as shall be established or ratified by the Company in relation to suitability for use of the goods in the territory.

11. The Company shall prepare a standard spares list not exceeding two per cent by value of the goods and the Distri-butors shall purchase import stock and maintain stocks of spares according to that list. Upon termination of this Agree-ment all stocks of spares held by the Distributors shall be held at the disposal of the Company and disposed of as it may at that time direct.

12. The Distributors shall have the right to appoint retail traders for the sale of the goods in the territory and shall authorise them to hold themselves out as authorised dealers in the goods provided however that if complaints shall reach the

Company from the territory in respect of the conduct of such retail traders the Company shall have the right to require that the Distributors take all necessary steps to rescind the appoint-ment of the offending trader as an authorised dealer in the goods.

13. The Company agrees to provide free of charge sale leaflets, sales aids and service manuals in language in such quantities as it shall consider reasonable.

14. In the event of delivery being frustrated or delayed by strikes, riots, lockouts, industrial action, trade disputes, acts of restraint of Kings. Princes or Governors or other cause not within the control of the Company then it is agreed that the Company shall not be held responsible for any loss of trade or profit consequent upon such cause.

15. The Company reserves the right to grant licences for the manufacture of the goods within the territory and itself to establish factories for the manufacture of the goods within the territory without consulting the Distributors or being liable in any way to remunerate the Distributors in respect of the sales of the goods thereafter manufactured within the territory.

16. The Distributors shall at all times keep and maintain proper books of account in respect of their purchases and sales of the goods and dealings in relation thereto which shall be available for inspection by any person duly authorised by the Company at all reasonable times.

17. The Distributors shall submit their schemes for publicity for the approval of the Company at six-monthly intervals and six months ahead of the date from which it is proposed that they should commence and the, Company agrees to reimburse the Distributors to the extent of one half of their publicity dis-bursements within six months after the completion of the carrying out of such approved publicity schemes PROVIDED ALWAYS that the liability of the Company under this clause shall in no case exceed two and one-half per cent of the value calculated F.O.B. United Kingdom port of the goods ordered by the Distributors in the six months' period during which a particular scheme is in operation.

18. The Distributors shall report in writing to the Company , within one month of the completion of each half-year upon

the conduct and development of business in the goods during the period and generally upon trade conditions in the territory.

19. Subject to the right of the Distributors under clause 12 hereof to appoint authorised dealers the Distributors shall under no circumstances assign or purport to assign the benefits of this agreement without the consent in writing of the Company.

20. Nothing in this agreement shall constitute or be deemed to constitute a partnership between the parties hereto or con-stitute or be deemed to constitute the Distributors as agents of the Company for any purpose whatever and the Distributors shall have no authority or power to bind the Company or to contract in the name of or create a liability against the Company in any way or for any purpose.

21. In the event of any dispute concerning the amount of any monies due or payable by either party to this Agreement to the other under this Agreement a certificate as to the amount signed by the auditors for the time being of the Company shall be conclusive and binding .on both parties.

22. The validity, construction and performance of this Agreement shall be governed by the law of England and any dispute that may arise out of or in connection with this Agree-ment, including its validity, construction and performance, shall be determined by arbitration under the Rules applicable to non-domestic arbitrations of the London Court of Arbitration at the date hereof, which Rules, with respect to matters not regulated by them, incorporate the UNCITRAL Arbitration Rules. The parties agree that service of any notices in this reference to such arbitration at their addresses as given in this Agreement (or as subsequently varied in writing by them) shall be valid and sufficient.

AS WITNESS the hands of the parties hereto the day and year first hereinbefore written:

(Signatures)

2.5 Selection of agents or distributors

You will, of course, have had to select your agent or distributor before you come to the point of submitting a draft agreement to your company's lawyer for approval. To do this selection, you should prepare an appropriate 'job specification' defining precisely what you will require your representative to do.

An old friend of mine, the late G.H. Sharman, wrote a splendidly practical publication called Thinking Managerially - About Exports. This is also published by the UK Institute of Export and I had the privilege of editing the second edition. In the book, Sharman advises the preparation of a 'personal specification'. This covers in exact detail precisely what you will expect your agent or distributor to do, plus the knowledge, skill, experience and other characteristics of a person who could do the job properly. You then try to get the best possible person or organisation that fits the description.

This follows the all too neglected managerial maxim that the more closely you define what you require, the more likely it is that you will get it.

Such an agency or distribution specification, according to Sharman, calls for exact thinking. You must never be imprecise. The specification is:

NOT 'to sell our products to buyers in Ruritania'. BUT What products? In what quantities? To which buyers? By what methods?

NOT 'to have warehouse facilities'. BUT How many square/cubic metres? Air-conditioned or not? In one centre or many?

NOT 'to be financially strong'. BUT How strong? How much liquid capital?

NOT 'to deal with complaints'. BUT With what authority to settle them on the spot?

NOT 'all products of the company'. BUT You may soon have different products from your present range. You may diversify. The new products may be bought by different customers and have to be sold by different methods.

'And markets are not places; they are people. You can have more than one market in one place. This is more likely when selling to industries. The firm that knows and has existing contracts with some industries may not know and may not make an effort to build contacts with others.'

The territorial limitations of an agent must be carefully thought out. 'Please do not appoint a company in New York to cover "North America". The Canadians wouldn't like it and the USA is rather a big place.'

'And never forget that a good agent or distributor will himself have questions to ask. He will know the sort of principal for whom he would like to work and have his own "negotiation brief'.' (G. H. Sharman.)

ACTIVITY 6 Prepare a detailed 'job specification' for an agent or distributor to sell your products in an export market of your choice. This could prove of enormous value in your forthcoming export trading. The job specification has no recommended length. It must contain all the essential information for the successful handling and sales of your goods in a foreign market-place.

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2.6 Summary

So far we have looked at the use of your own salesmen and the appointment of either agents or distributors to act on your behalf in prescribed territories. The essential points to remember about distributors are:

• You sell to a distributor whereas you sell through an agent.

• A distributor represents one large credit risk for the territory, but it is not difficult to check and monitor one credit status.

• A distributor means only one customer in the territory.

• No taxation liability arises for you under a distribution agreement.

• Your business policy may be affected by your distributor's liquid capital and his wish to concentrate upon sales of those goods which give him the greatest profit.

• The relationship between you and your distributor should be the subject of a distribution agreement which should be prepared in accordance with the advice in this chapter and approved by your legal advisers.

2.7 Other forms of distribution

Your own field organisation

We are living more and more in a technical world. Even in the least developed countries there are some offices where word processors have replaced typewriters, where electronics play a part in defence systems and occasionally in the manufacturing process. In your own offices in Pakistan you will undoubtedly be surrounded by photocopiers and other forms of modern office equipment. Computer databases form part of your information technology; motor cars become more sophisticated annually; and homes, wherever possible, enjoy labour-saving equipment.

If you are manufacturing technical equipment or supplying technical services, you might like to consider attaching your own technical export salesmen to your agents or distributors. Your representatives will undertake all the importing of your products and the processing of the associated shipments. Your own technical export salesmen will provide all the technical assistance your clients may require and can be used to obtain orders. They fully understand the products and services and can do the job that much better than representatives.

The more technical your products become, the more you should consider this type of customer contact and have your agency or distributor agreements adjusted accordingly. Your agents and distributors will realise that they cannot be as technically competent as you, the manufacturer or service provider, and that they can use their time on what they do best: import processing.

The following forms of contact, on the other hand, with your customers in the foreign market-place may not be practical at the moment, but they are methods of international operation which you should note for the future.

Establishing your own foreign branch

If you decide that support services cannot be provided adequately by local agents or distributors, you may have to consider the cost and effectiveness of setting up your own organisation abroad. This is likely to be economic only in larger or long-term markets.

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The first decision that you will have to make is whether a branch or a locally-incorporated company is required. Branch offices - that is to say, not locally-incorporated bodies - have advantages if your activities are to be limited to sales and representation.

Branches are relatively inexpensive to operate and are normally straightforward to close down. The disadvantage for you here is that your company in Pakistan - the 'parent company' - may well be exposed to local taxation because it is now actively 'trading' in the foreign country.

A difficulty for you regarding branches is ascertaining whether, and if so, under what conditions, a branch office may be operated. Sharman, the export management specialist, states: 'A very few countries prohibit them. A few permit them and state exact conditions. Most counties prohibit unless permitted, prohibit until permitted, permit until prohibited or permit unless prohibited. Or say nothing at all and are loath to give a firm reply to any question!'

The multinational situation

Where it is not possible to establish a branch office, or if you decide that a larger organisation is required, for example, for local manufacture to obviate tariff and other import restrictions, you might consider the establishment of a company - an incorporated body - in the foreign market.

Each country has its own corporation laws with which the local lawyers will be well acquainted. The difficulty for you is that you will find it virtually impossible to discover a precise equivalent abroad of the type of organisation that you have in Pakistan. This is a situation where you should take advice from your company lawyers who will know who to approach in the relevant foreign countries. This is because methods, regulations and costs of forming and operating companies vary from country to country and sometimes even within countries, the United States of America, for example.

If you make the decision to become a multinational organisation by operating a company in a foreign territory, a further decision is inevitable: will you form a company, buy a company, or merge with an existing company

If you ponder this situation for a moment, you will realise that each possibility has its problems. The best method is undoubtedly to form your own company abroad, for this will provide you with exactly what you require. But it will be an expensive operation and probably take a long time. There are two problems related to buying a company: only poor companies are cheap and, secondly, the existing staff tend to carry on as they did under the previous ownership. If you merge with another company by definition you have no complete control. This is a decision which requires immense thought and legal consultation.

Indirect trading

So far I have considered the forms of representation that you can use within the markets you have chosen for the sale of your products or services abroad. This presumes that you and your company wish to operate as exporters.

There is another way of working: indirect trading. This may well not be so advanced in Pakistan as it is in the developed world, but it is important that you should know of the various forms of export help that you can enlist.

Generally, it is accepted that seven forms of export assistance are available: export management companies, merchants, manufacturers' export agents, confirming houses, buying or indent houses, factors, and finance houses. These are sometimes referred to collectively as export houses. Brief details of each of these forms are set out below for your information.

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Export management companies work very closely with manufacturers and often become their export departments. Where a full service is offered, they become responsible for promoting your export sales, handle all your documentation and shipping, and organise payment from abroad, giving credit, where appropriate, to customers on a non-recourse basis.

In many cases, the export management service is reduced as time goes by, particularly as regards the actual promotion and sale of your goods, over which you probably do not wish to surrender your sovereignty. Companies who export in this way frequently also begin to learn a great deal about the export processing operation and start to undertake some of this themselves. Invariably, however, these organisations find it invaluable to use export management companies as a source of finance to ease cashflow, to obtain payment for exports and to attend to credit insurance.

Your contract with an export management company must cover all the services which you require such a company to perform on your behalf.

Merchants act as principals in export transactions and buy and sell on their own account. Frequently they are specialists in certain market areas, for example, in Fgstem European trading where they are knowledgeable in countertrade and triangular trading, etc. or in certain products for which they have their own distribution system available. Manufacturers can do business with merchants and receive money more quickly than if they were trading with foreign customers themselves.

Your contract with a merchant would, of course, be a domestic contract of sale (see Section 3).

Manufacturers' export agents often undertake the exporting activity of several complementary manufacturers in one particular branch of industry. They also specialise in particular market areas and negotiate directly or in the names of their clients. When working with such an organisation you must have an agreement laying down precisely what services the export agent will carry out on your behalf and for what consideration. This is a contractual association which must be approved by your company lawyers.

The above types of export houses represent organisations which work on behalf of the home manufacturer, selling his products abroad. There are, in addition, two types of export house which represent foreign buyers: confirming houses and buying or indent houses.

The term confirming house has no definite meaning either in law or commercial practice. Such an organisation may act: (1) on behalf of your foreign buyer as his agent, (2) as a principal actually buying from you, or (3) by placing the order as agent of your foreign buyer but indicate that it will hold itself personally responsible to you for the price. The method it chooses to use will indicate precisely the legal relationship it has with you, i.e. as an agent for the buying principal, as the principal in the contract, or as agent for the buying principal but with responsibility for ensuring payment for the goods. Contracts of sale should exist in each case, specifying the particular situation (see Section 3 for the essential constituents of such contracts).

Buying or indent houses are a development of the system whereby numcrous large retail organisations in any country establish offices in other countries in order collectively to purchase from manufacturers in those territories. The extension of the system relates to the establishment of independent houses who act on behalf of well known, large foreign department stores: an excellent outlet for many products of the developing world, including Pakistan.

With such houses you can arrange what are virtually home sales contracts because the buying houses usually arrange shipment to their foreign principals, the department stores.

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Factors are organisations which take over for a fee the sales ledgers (home, export or both) of companies. They are designed to take any 'fears' of non-payment away from you. They will buy your invoices from you and, if you so require for your company's cashflow, advance up to 80% of the value. They then arrange collection of amounts owing in your importer countries via correspondent factors and then pay the balance. The charges for export factoring vary between I% and 2.5% of factored sales and cover the services of sales accounting, credit insurance and the collection of moneys. Naturally, interest payments are charged upon advances which are often marginally higher than bank overdraft rates.

Finance houses enter the export scene in the medium and long-term credit field. They have been described briefly as 'houses which provide the financial lubrication which makes possible many of the larger capital equipment package deals. Their knowledge of the market gives them access to sources of export finance which are of particular value to manufacturers in the capital equipment field. They are well versed in the possibilities of both supplier and buyer credit availability and provide non-recourse finance for the exporter supplier.'

2.8 Summary

In this section we have looked at the usual methods of contact between exporter and buyers.

Most companies begin by using their own specialist export salesmen, who must be well-qualified in all aspects of export practice, in addition to being knowledgeable about their products.

Representation in the foreign market-place is usually by agent or distributor, but there are essential differences. Basically, and it merits repetition, you sell through an agent but to a distributor. Agreements are essential in both cases.

Where products are of a truly technical nature it is valuable to attach your own technical export salesmen to your agents or distributors as a field organisation.

More sophisticated forms of customer contact are through branch offices in foreign market-places or by the incorporation of your own companies abroad.

Finally, there are several forms of 'indirect' exporting opportunities through what are collectively described as 'export houses'.

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Self-assessment questions

Try to answer the following questions to check whether or not you have grasped the main points of this section. Look back through the section if you are uncertain.

(a) Why should domestic sales staff not be employed on export sales duties without appropriate training?

(b) What is the essential difference between agents and distributors?

(c) Why is the duration clause of an agency agreement of extremeimportance?

(d) What attributes of an agent or distributor are essential to your 'job specification' for such representation?

(e) What are the ways of establishing your own company in the foreign market-place and what problems do you associate with each?

(0 If you wished to become an 'exporter', i.e. have your products or services sold in foreign markets, but did not wish to undertake the export process, what types of organisation are available to assist your 'indirect trading'?

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3 International contracts of sale In this section I propose to examine the contractual situation between you and your buyer in an international sale of goods.

So far we have considered only your relationships with your representation in the foreign markets of your choice. Where you use your own technical specialist export salesmen or sell through an agent, you will require to be in a contractual relationship with your buyers, the other principals in your contracts of sale. Where you use a distributor, the distributor will be the other contractual principal. If you establish a branch office, once again you will be in direct contractual relationship with buyers. If you enter the market-place on a multinational basis, it is most likely that you will be in touch with customers in that area via domestic contracts of sale.

No brief chapter in a publication of this kind can do justice to the all-important subject of international contracts of sale. In the first instance, therefore, let me recommend two publications, again written by Clive Schmitthoff, that will be of invaluable assistance in your studies. The first is Schtnitthoirs Export Trade - the Law and Practice of International Trade (eighth edition) (see Section 10). Do not be put off by this title. The book is written with you the exporter in mind and is eminently readable. The second text book is the third edition of Schmitthoffs Legal Aspects of Export Sales published by the UK Institute of Export. The author also writes regularly on topical problems of international trade law in Export, the journal of the UK Institute of Export.

An international contract of sale comes into existence when an unambiguous offer from you is accepted unconditionally by your buyer in the foreign market, and some form of valuable consideration for the transfer of property in the contract subject matter, i.e. payment for the goods or services, is agreed. That is to say, you offer goods for sale and somebody agrees to buy and pay for them.

The contract usually arises through an enquiry from a prospective buyer in reply to which you send a quotation indicating your price to a prescribed delivery point. As this is merely a quotation, you should make it clear that if it is not immediately acceptable to your customer, it may be used as the basis of an offer to purchase. If your buyer feels the quotation requires negotiation, you both confer until an acceptable 'bargain' is reached.

Your customer will then place an order on you. You, in turn, will accept this and advise the buyer accordingly. For the sake of complete certainty, it is advisable that your customer acknowledges your acceptance. Now both you and the buyer are aware that you are in contractual relationship.

3.1 The contract

The most obvious, but most important, aspect of the contract of sale as far as you are concerned is that you must carry out the sale on the terms and conditions which you have agreed with your buyer. Prior to signature of such a document, you must ascertain all that will be expected of you by your foreign customer and, if any uncertainty exists, consult your company's lawyers as to the possibility of performance.

Three essential points which should be considered within the contract are:

1 The law which will govern the contract in the event of dispute. As we are discussing an export contract, it goes without saying that whereas you as a Pakistani exporter are operating under Pakistani law, your customer is operating under a different national legal system. Which will be the law of the contract? Parties to contracts of international sale should always state the legal system they require to be applied to such contracts. If this is not done and legal disputes arise it is likely that the courts will be asked to decide the legal system with which the contract is most closely associated.

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2 The precise documents which you will have to pass to your customer. A bill of lading, for example, is a title document and can thus indicate ownership of the goods. Similarly, release of payment to you in a documentary credit transaction will depend upon your compliance with the letter of credit instructions.

3 Any qualifications or exclusions of liability which are normally imposed upon you under Pakistani law (exemption clauses). If you intend to qualify or exclude any liability as imposed upon you by law that must clearly be brought to the notice of your buyer. If you do not do this, such qualification or exclusion will most probably be ineffective. This means that all the facts regarding your own law precluding you from doing certain things must be known by your buyer and that the contract is to be concluded subject to them. An example of this is the stating of maximum liability of shipowners to exporters as laid down by the laws relating to the carriage of goods by sea.

3.2 Other contract elements

Your contract should state specifically who the principals in the sale are. Frequently such parties as selling agents or confirming houses are mentioned within export sale contracts but these are usually not principals. There must be no doubt whatsoever as to the actual seller (yourself) and the buyer of your goods or services.

The description of your goods or services within your contract of sale is of fundamental importance, for every item in a description can be legally regarded as a substantial ingredient of the item you are selling. If you do not comply with any descriptive item, for example, colour or form of packaging, this can be a breach of contractual condition which will permit your contract to be repudiated by your buyer.

In some legal systems there is a difference between conditions of contracts and warranties. Conditions are of the essence of a contract, that is to say, the buyer is entitled to reject the goods if a condition is broken; warranties are contract terms of lesser significance under which buyers may claim only damages and may not reject the goods.

What is the situation as far as conditions and warranties are concerned in Pakistani contract law? If your contracts are to operate under your own laws you should be aware of this sort of thing, because sometimes in the export trade when the maticet price moves against your buyer he might use any excuse to reject the goods because they may no . longer be profitable to purchase.

Where the description of your goods within your export sales contracts is supported by a 'sale by sample clause (that is to say, a clause which indicates that the goods to be supplied under a contract will be in accordance with the quality and characteristics of a sample already supplied), you should note that under some legal systems this means that the bulk of the goods should correspond by sample, that your buyers should have a reasonable opportunity of comparing the bulk with your sample, and that the goods should be free of any hidden defect, not ascertainable on reasonable examination but, because of which, the goods do not conform to agreed standards. Associated with this is the concem of negligence in production. The exporter must ensure that he keeps to the description of the goods and the warranties contained in the international contract of sale.

Price

You will have to consider not just the price which you have agreed with your buyer, but what that price incorporates and where payment is to be made. Price will normally be that which you have agreed with your buyer plus the costs of any services you are providing on behalf of your buyer in accordance with your agreed terms of delivery. Terms of delivery will be considered in Section 4. Where payment is to be made varies with the method of payment used. For example, with collections (bills of exchange) payment is made in your buyer's country, but if you are operating under documentary credit terms you will collect payment in Pakistan.

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The currency in which payment is to be made must also be defined in your contracts. The time when payment to you is due depends upon whether your sale is on a cash or credit basis, which will also have to be defined in your contracts.

Where you have relaxed a contract condition of your buyer, for example, deferment of delivery or payment date, and you have insisted upon some form of consideration, all is well, for you now have a new contractual agreement. However, if you have not done this for some sort of consideration from your buyer, you might find it necessary to consult your company's lawyers to have the original contract terms reintroduced and strict performance ensured. Being a 'reasonable' exporter could cause you problems, so where relaxations in contract conditions are concerned, you should insist upon formal agreement.

3.3 The passing of property

The passing of property means the transfer of title or ownership of the goods from you to your customer. (As you know from experience, in international trade goods often travel very long distances between buyer and seller in the physical possession of a third party: the carrier. Although he is in such physical possession, the carrier does not own the goods. The carrier may well have a right to (or, legally speaking, a lien on) the goods as long as he holds them in possession, but only for freight due on the carriage of the goods in question. He may also be given a general lien for any previous freight unpaid by you. Such clauses are common in contracts of carriage).

Under the laws of many countries, property in goods actually passes when parties to contracts intend it to pass whether delivery takes place or not; in the laws of other countries, property passes only where the intention for it to pass is supported by delivery of the goods.

Unfortunately, them is no worldwide agreement for the unification of the law of international sales. Two uniform laws were adopted at a conference in The Hague in 1964: The Uniform Law on International Sale of Goods and The Uniform Law on the Formation of Contracts for the International Sale of Goods. However, as so few countries had ratified these, the United Nations Commission on International Trade Law tried to force the pace of international agreement. Consequently, in April 1980 the UN Convention for the International Sale of Goods was approved by a diplomatic conference in Vienna. This, known as the Vienna Convention, is based upon the two Hague Conventions and international trade lawyers hope that it will command considerable international support in the course of time.

What is the Pakistani position regarding ratification of either the Hague or Vienna Conventions? This is an area which you could, with value, discuss with your company lawyers as you might well be able to adopt the provisions of some Uniform Laws in your contracts. However, you must also be aware that if you do adopt such laws where Pakistan has not ratified them and introduced them into its legal system, you will still have to adhere to laws which do exist and which would have been applicable if you had not adopted the Uniform Laws.

The advantage of the use of Uniform Laws in international trade is to avoid or reduce the dangers of a conflict of national laws.

I propose to recommend to you the adoption of International Chamber of Commerce (ICC) terms of delivery: 'Incoterms' (see Sections 4 and 10). Under these terms the place of delivery is defined. The passing of property, however, is a very different matter.

You will recall that the first essential point I discussed regarding international contracts of sale was 'the law of the contract'. It follows from this, therefore, that your contracts will be under Pakistani law if you so requite and your position as the supplier is strong enough to persuade your buyer to accept this. However, it is also possible that some of your contracts may operate in accordance with the laws of your buyers' countries or in

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accordance with other agreed legal systems. It is obviously impossible for me to consider every national view in a book of this nature. Here are some aspects of the passing of property which you should investigate:

• Are your goods ascertained (identifiable without doubt, i.e. a product bearing an individual series number) or unascertained (sold by general description of type or quality)? This is important for, by definition, there can be no passing of property in unascertained goods with certainty if goods cannot be identified.

• Property in your goods can pass only when you and the other principal to your contract intend it to. You might agree, for example, that ownership is transferred by you only upon receipt of payment. You might consider other conditions which you would be prepared to apply.

• It may well be that the law presumes property to pass at certain times according to the nature of the contract, that is to say, on delivery of the bill of lading to your buyer or his agent or by the payment or acceptance of a bill of exchange together with the accompanying commercial documents.

• In contracts where you have no requirement to provide a document of transport incorporating title to the goods, for example, in such contracts as ex works, orthodox FOB or delivered duty paid (DDP), the actual delivery of the goods can transfer property to your buyer.

• Does property in the goods revert to you under the contract if your goods are found not to be in accordance with contract description? Additionally, where and when does the law concerned afford the buyer a reasonable opportunity to examine the goods? This incorporates an examination of your buyer's rights of rejection of the goods. If the right of rejection has been lost, does he retain a right to damages if your goods turn out to be, for example, inferior to those described within your contract?' In international trade today, the buyer frequently arranges for an inspection company to ensure that the goods are as ordered: of the right quality, quantity and price. This is usually done at the buyer's expense but in the country of export, usually prior to packing at the exporter's premises.

Summary

The passing of property in the goods from seller to buyer is what the international sale is all about. Property' means tide to or ownership of the goods.

The shipowner carrying the goods has a right to the goods as far as payment of the freight due is concerned (or for any outstanding freight payments of the shipper).

Under some national laws, ownership of goods passes from seller to buyer when the parties to the contract intend it to pass. Under other laws, it passes where it is intended to pass but supported by delivery. This variation in laws would disappear if there was universal acceptance of Uniform Laws.

If goods can be identified without doubt, they are known as 'ascertained' and ownership can be passed with certainty. Goods which cannot be so identified are known as 'unascertained' and ownership cannot therefore pass with the same certainty.

Exporters can ensure that ownership of the goods passes to their buyers when they want it to, e.g. only upon receipt of payment.

Where the contract does not stipulate what the principals intend, the law may presume property to pass at specific times, i.e. at delivery of the bill of lading or on payment or acceptance of a documentary bill of exchange. Where no document of transport is required, delivery itself can transfer ownership to your buyer. It is wise for you to investigate what happens to the ownership of the goals if your buyer rejects them because they are not in accordance with customer description.

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3.4 The passing of risk

The passing of risk of loss of or damage to goods sold under export contract usually means the passing of responsibility for making the insurance claim against loss or damage. At every point in the transport of your goods from your place of export to the buyer's premises it must be ascertainable as to who bears the risk and consequently has the right to benefits arising from claims against the relevant insurance policies. In the event of goods being uninsured during transport from you to your customer, the risk will be for the owner of the goods at the time of loss or damage, the owner being identified according to the transfer of property in the goods.

As I have already stated, the price your customer will pay under the contract is a price related to a specific delivery term. I have also recommended that ICC's Incoterrns (see Section 4) be used as these can be agreed and accepted by buyers and sellers of all nationalities. As you will see later, Incoterms are a neutral set of rules and conditions relating to international delivery which can be adopted by buyers and sellers everywhere. If you do decide to adopt Incoterms, you will find that the point at which risk in the goods passes from you to your customer is laid down for each delivery term as set out below. Don't worry about the precise meanings of each term; these will be enlarged upon in Section 4 at which time you may find it helpful to refer back to this section.

Ex-Works (EXW). When the goods have been placed at the disposal of the buyer at your premises.

Free carrier (named point) (FR C). When the goods have been delivered into the charge of the carrier at the named point.

Free on Railway/Free on Truck (FORIFOT). When the goods have been delivered into the custody of the railway.

Free on Board Airport (FDA). When the goods have been delivered to the air carrier at the airport of departure.

Free Alongside Ship (FAS). When the goods have been placed alongside the ship on the quay or in lighters.

Free on Board (FOB). When the goods pass over the ship's rail at port of shipment.

Cost and Freight (CFR). Same as Free on Board.

Cost, Insurance and Freight (CIF). Same as Free on Board. Under a CIF delivery you will procure the marine insurance cover and pay the premium and then assign the policy to your buyer.

Freight or Carriage Paid To (named point) (DCP). Same as Free Carrier (named point).

Freight or Carriage and Insurance To (named point) (CIF). As Free Carrier (named point). With CIP delivery, you will procure the marine insurance cover and pay the premium and then assign the policy to your buyer.

Ex-Ship (EXS). When the goods are placed at the disposal of your buyer on board the ship at the destination named in the sales contract.

Ex-Quay (EXQ). When the goods are placed at the disposal of your buyer on the wharf or quay at the agreed port of destination.

Delivered at Frontier (named point) (DAF). When the goods are placed at the disposal of the buyer at the named place of delivery at the frontier.

Delivered Duty Paid (DDP). When the goods are placed at the disposal of the buyer, duty paid, at the named place of destination in the country of importation.

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Summary

At every point of transit between exporter and importer one party to the contract must be responsible for damage to or loss of the goods. The party responsible for this risk at the various stages of delivery is defined by the appropriate delivery term accepted in the contract It is recommended that Incoterms are adopted so that certainty regarding risk responsibility exists.

3.5 Other aspects of international sales contracts

Other aspects of international sales contracts of which you should be aware are:

• rights of an unpaid seller against the goods • inflation • frustration of contracts • force majeure.

Rights of an unpaid seller against the goods

The law of your contract should be examined with the assistance of your lawyer, for it is always advisable to get the best possible results from any situation without recourse to litigation. In international trade, as you have already experienced, goods are often despatched or services provided to buyers before you receive payment. What, therefore, are your rights if the goods have been despatched or services provided but payment is not received, for example, because of the sudden insolvency of your foreign customer?

I have already suggested that property in the goods can be retained by you until such time as you have been paid. However, even when such a prudent clause is not included in your contract of sale, some laws (English law is a good example) give valuable rights to you as an unpaid seller. Examples of these are: the right of lien, stoppage in transitu, and resale.

• The right of lien, which is the right of retention of the goods, can obviously be exercised only when the goods are still in your possession. It follows, therefore, that this seldom arises in international trade.

• The right of stoppage in transitu arises more frequently and is of considerably greater importance. This right can be claimed only in the event of buyer insolvency and exercised only during the transit of the goods. You, as the seller, advise the carrier that he should not deliver the goods to the buyer and instruct regarding return or alternative delivery. Undertaken successfully, stoppage in transitu once again vests the property in the goods in the seller.

In English law, for example, the right of resale is without further notice to the buyer in the case of perishable goods, such as fruit or horticultural products. However, in the case of goods of a non-perishable nature, the right of resale is conditional to notice being given to the buyer of your intention to resell if the buyer does not pay you or tender the price within a reasonable time.

Inflation

Most countries of the world have experienced relatively high rates of inflation over the past two decades owing to such major economic incidences as the quadrupling of oil prices in the early 1970s. Some developing countries have experienced extraordinarily high inflation rates. Thus a price agreed between you and your foreign customers can remain the price you are seeking only for a short space of time. With high inflation late payments produce amounts which can buy less in your domestic market than prompt payments would.

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It is advisable, therefore, to include a rise and fall clause in your export contracts to cover increases in costs of labour, materials and services between date of quotation and date of delivery. The cost of money and the inflation rate must be considered and covered in prices quoted when you are giving credit.

The following is an example of a rise and fall clause which you should endeavour to have accepted in your contract of sale:

That, unless firm prices and charges are agreed upon, the seller shall be entitled to increase the agreed prices and charges by the same amount by which prices and charges to be paid by the seller have been increased between the date of quotation and the date of delivery'.

It is, of course, possible to estimate inflation rates and take them into consideration when quoting. Again, in foreign trading, exporters frequently price in stable world currencies to offset inflation risks. Exchange risks can be avoided by foreign exchange contracts with your bank. It is possible to invoice in European Currency Units of the European - Community (ECUs) or Special Drawing Rights of the International Monetary Fund (SDRs). These are more stable than any other currency, because they are made up of baskets of currencies. When one currency falls another will rise, maintaining a stable ECU or SDR. If you use this form of pricing, you will eventually be paid in your own currency, at the ECU or SDR rate on the day of settlement.

Frustration of contracts

Generally, international contracts of sale are frustrated, i.e. void or no longer in existence, only when events of such magnitude have unexpectedly occurred after the conclusion of the contract that a fundamentally different situation has been created. Frequently such events as sudden price fluctuations occur, but as such do not necessarily qualify for frustration of contract. It is all a question of degree. Examples which have qualified as frustration causes are export and import prohibitions; an outbreak of war; and destruction of the subject matter.

In some legal systems, however, the conditions which qualify to frustrate contracts are relatively easy to satisfy. What is the situation regarding frustration of contracts in Pakistani law? It is important for you to ascertain this as the occasion may arise - a falling market, for example - when your buyer may wish to have the contract declared frustrated!

Force Majeure

International contracts of sale should contain force majeure clauses listing events such as strikes or other industrial relations problems which could be cause for postponement of your contract performance rather than contract termination. In this connection the International Chamber of Commerce has again helped the trader. Their booklet (ICC Publication No.421 - see Section 10) takes into account the variation in national legal systems' approaches to force majeure and has recommended a clause in general terms.

I recommend that you study the clause in ICC booklet No.421 and incorporate it in your export contract by using the following wording:

"The Force Majeure (exemption) clause of the International Chamber of Commerce (ICC Publication No.421) is hereby incorporated in this Contract'.

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Finally, another word about the law of the contract. International traders are usually free to make contracts of sale subject to any law they wish. However, the law of the contract clause should be very carefully worded to ensure that both the conclusion and the performance, in every respect, of the contract is subject to the specified legal system. Failure to do this might easily complicate the issue by the existence of two relevant systems: one for the contract of sale itself and another for various aspects of contract performance. Various legal systems differ on which law governs the contract in the event of a dispute.

In several countries, including CONIECON countries when trading with each other, the principle is adopted that, unless otherwise agreed, the law of the seller's country applies. Under English law, a contract is governed by the law which the parties to the contract intend to govern it. If the details are not included in the contract the courts will establish what they consider to be the legal system with which the contract is most closely connected Is this what happens in Pakistan?

3.6 Summary of contract of sale

An international contract of sale comes into existence when an unambiguous offer from you is arrepted unconditionally by your buyer in the foreign market, and some form of valuable consideration for the transfer of ownership in the contract matter, i.e. payment for the goods or services, is agreed.

Immense care should be given to:

the law of the contract

the documents to be provided to your customer

• any exemption clauses required by your law

the principals to the transaction

• the description of the goods or services

• conditions and warranties

price (in what currency) and method of payment

delivery terms

• where ownership passes to the buyer

• where risk passes to the buyer

• inflation cover

force majeure.

You should also be aware of any rights you possess as an unpaid seller and such aspects of law as when international contracts of sale can be declared 'frustrated' (void).

ACTIVITY 7 Obtain for yourself a copy of one of your company's international contracts of sale, or ask a colleague if you are not an exporter, and check through to see whether or not all of the items mentioned in this section have been adequately covered. Do this now. It could save you considerable irritation, time-wasting and profits on future contract&

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Self-assessment questions

Again, as in Section 2, you should check your understanding of the main points in this section. Look back through Section 3 if you are uncertain.

(a) What are the most important aspects of the contract of export sale as far as you, the exporter, are concerned?

(b) How important is the description of your goods and/or services in the international contract of sale?

(c) What is the usual distinction between a 'condition of a contract and a 'warranty'?

(d) When you sell by sample what opportunities should your buyer have of determining whether the goods supplied are according to sample?

(e) What does 'price' involve in a contract of export sale in addition to a stated cash

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amount for a given quantity of goods?

(f) What do you understand by the 'passing of property'?

(g) What do you understand by the 'passing of risk'?

(h) What are the rights of an unpaid seller in export trading?

(i) How can you overcome the problem of 'inflation' in an export contract?

(j) What do you understand by the 'frustration' of a contract?

(k) How can you deal simply with force majeurei

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4 Delivery In this section I propose to show you how your responsibilities as a seller in an international contract of sale and the responsibilities of the buyer may be determined, to the satisfaction of you both, by the simple incorporation into the contract of a valuable set of rules and conditions prepared by the International Chamber of Commerce (ICC) and called Incoterrns.

When we discussed international contracts of sale in Section 3, I made special mention of delivery and stated that I proposed to recommend to you the adoption of Incoterms. I now intend to deal with these terms in more detail.

If you are like the majority of businessmen, you enjoy the challenge of assuming the entrepreneurial risks of business ventures but you also appreciate certainty in contractual detail. Incoterms bring certainty of responsibilities under agreed international delivery terms.

More than 50 years ago the ICC asked: 'Why should there not exist a worldwide understanding of delivery terms which can be incorporated within any contract so that each principal to the contract understands, in each case, precisely what he has to do?' They realised that parties to international contracts are frequently unaware of differences in trading practices in each other's countries.

Their investigations showed that diversity of interpretation was a constant cause of friction in export contracts, friction which invariably led to misunderstandings, disputes and referrals to courts with all the waste of time and money these entailed. In 1936, therefore, the ICC published a set of international rules for the interpretation of trade terms: 'Incoterms 1936'.

Seventeen years later they felt it necessary to revise the 1936 rules to provide an up-dated set 'broadly in line with the current practice of a majority of the businessmen engaged in international trade'. Incoterms 1953', under which title they were published, were republished unchanged in 1976 but the opportunity was taken to add a supplement containing two additional definitions previously published separately.

The latest edition at the time of preparing these notes is dated 1980, which, because of the revolution in international carriage, revises the previous rules by taking into consideration multi-modal deliveries (deliveries involving more than one method of transport), containerisation, roll-on/roll-off operations, road transport and the progress of the carriage of goods by air.

I have given you this brief history of the Incoterms to show that the ICC keep abreast of world trade practice to ensure the terms stay relevant to modern trading. I understand that a team of international trade experts is currently considering yet another revision of the terms, particularly, I am informed, to produce a precise term for delivery by road.

I now propose to consider each term separately, list the principal responsibilities of buyers and sellers, explain how the terms relate to differing methods of carriage and then show how Incoterms can be incorporated as a contractual condition of an international sales contracL Before considering the terms I must point out that they are listed in ascending order of responsibility for the seller. The terms start with Ex-Works, where you merely arrange for your buyer to take delivery at your premises, and finish with Delivered Duty Paid, under which you deliver to your customer at his premises in his country with all expenses paid thereto including import country duties and taxes.

Incoterms have no legal standing on their own. They present a set of 'neutral' rules and conditions to ensure the widest acceptance in most countries. For example, the 'American Revised Foreign Trade Definitions' are being phased out in favour of Incoterms.

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4.1 Use of Incoterms

The current issue of Incoterms has terms especially prepared for containerisation and multi-modal transport. With container shipments, for example, the containers are normally delivered by the exporter to the carrier at an inland container depot. The terms FOB, CFR (which used to be known as C & F), and CIF, therefore, are inappropriate. Under these terms the goods are delivered to vessel and you are almost certainly very familiar with them, even though you may not appreciate their precise meaning. The container equivalents are FRC, DCP and CIP. At this stage you should examine the seller's primary duties as listed below and note the differences.

Because the terms FOB, CPR and CIF have been in use internationally for so many years, traders throughout the world seem reluctant to depart from them. Imagine, therefore, a container shipment sold incorrectly on FOB terms. The container will be delivered into the charge of the carrier named by the buyer, usually at an inland container depot. However, an importer buying on FOB terms will expect to insure the goods only from port of departure in the country of export. The transport from an inland container depot to port of departure may, therefore, be uninsured (see Section 3). This could cause considerable problems and large losses.

4.2 Using Incoterms as a marketing tool

As I have stated, Incoterms are presented below in increasing order of responsibility for the exporter. The more responsibility the exporter assumes, the easier it is for the import customer to indulge in international trading. Therefore, my recommendation to you is always to try to sell at the levels where you take major responsibility, Delivered Duty Paid, for example. You are saying to your customer: 'Let me make life simple for you. I will do all the work and assume all the risks.' In this way you use Incoterms as a marketing tool to ensure you get the orders rather than your less sophisticated competitors. You may also be able to charge higher prices and promote a higher quality image for your firm with such a policy.

4.3 Incoterms as a contractual condition

The recommended way of ensuring that you and your customer both understand that your delivery term agreed in the contract is in accordance with Incoterms 1980 is by expressed intention in the contract. Here you should note that Incoterms have been prepared on the basis of the seller's minimum liability. If your buyer wishes to increase your obligation - for example, more extensive insurance cover - your contract can be adjusted accordingly.

There are other ways whereby Incoterms can be introduced into export contracts. In some areas of international commerce they have been accepted as the 'custom of the trade'. In other areas of international commerce, certain trades have their own standard forms of contract which include Incoterms. In some statutory rules, for example, some Sales of Goods Acts in certain national legal systems, Incoterms are a legal requirement_ Lastly, the acceptance of the terms to define buyer and seller responsibilities and the delivery point can be implied as terms in contractual negotiation.

Incoterms 1980 is available in English, French and bilingual English-German, which means that it should not be difficult for your buyers to obtain copies which they can easily understand. Remember that you have a National Committee of the International Chamber of Commerce in Karachi where you can easily obtain ICC publications. The address is given in Section 2.

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4.4 The Incoterms

Ex-Works (EXVV). The seller's primary duties are to deliver the goods to the buyer at his (the seller's) own premises.

Primary duties of the buyer are to:

• Take delivery of the goods at the seller's premises. . • Make all arrangements at his own cost and risk to take the goods to destination.

Free Carrier (named point) (FRC). This is the container equivalent of Free on Board (FOB) (see later) as containers are delivered to inland clearance or container depots rather than direct to port.

Under this delivery term the seller's primary duties are to:

• Deliver goods at the named point into the charge of the carrier named by buyer. • Provide any export licence and pay export taxes and fees, if required. • Provide evidence of delivery of the goods to the carrier.

The buyer's primary duties are to:

• Nominate the carrier. • Contract for the carriage and pay the freight.

Free on Rail/Free on Truck (FOR/FOT). The major point to remember about this term is that it refers to rail transport only. Free on Rail and Free on Truck are intended to be synonymous. Free carrier (named point) (FRC) or other appropriate terms should be used for road transport.

The seller's primary duties are to:

• Deliver the goods into the custody of the railway and, in the case of 'full loads', procure and load the wagon(s). • Furnish the invoice and usual transport document to the buyer.

The buyer's primary duties are to:

• Notify the seller of the destination of the goods and pay for the freight. • Accept delivery of the goods when they have been delivered to the railway and when the invoice and transport document are given to him. • Obtain any export licence and pay export taxes and fees, if required.

Free on Board Airport (FOA). This is based upon the same principle as Free on Board (FOB) but goods are delivered to the air carrier at the airport of departure rather than on board a vessel. In addition, the seller usually contracts for the carriage as an 'additional service' to the buyer.

The seller's primary duties are to:

• Deliver the goods to the air carrier at the airport of departure. • Contract for carriage unless contrary notice has been given. • Notify the buyer if he wishes the buyer to contract for carriage. • Obtain any export licence at his own risk and expense.

The buyer's primary duties are to:

• Accept delivery of the goods to the carrier at the airport of departure. • Pay the freight. • Notify the seller if he does not wish him to contract for carriage.

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Free Alongside Ship WAS). The basic difference from FOB (below) is that the buyer is responsible for clearance of the goods for export.

The seller's primary duties are to:

• Deliver the goods alongside the ship. • Provide an 'alongside' receipt.

The buyer's primary duties are to:

• Nominate the carrier. • Contract for the carriage and pay the freight. • Obtain any export licence and pay export taxes and fees, if required.

Free on Board (FOB). Under this perhaps best-known conventional shipping delivery term which may involve variations in the division of costs, such as where shipment is on 'liner terms' or where there is an accepted custom of the port, the seller's primary duties are to:

• Deliver the goods on board. • Provide the export licence and pay export taxes and fees, if required. • Provide a clean 'on board' receipt. • Pay loading costs according to the custom of the port to the extent that they are not included in the freight

The buyer's primary duties are to:

• Nominate the carrier. • Contract for the carriage and pay the freight. • Pay loading costs to the extent that they are included in the freight • Pay unloading, costs.

Cost and Freight (CFR). This term, until recently, was better known as C & F which it replaced for data transmission purposes. C & F remains in common trade usage.

The seller's primary duties are to:

• Contract for the carriage and pay the freight to the named destination. • Deliver the goods on board. • Obtain any export licence and pay export taxes and fees, if required. • Furnish to the buyer the invoice and a clean on board bill of lading. • Pay loading costs. • Pay unloading costs to the extent that they are included in the freight.

The buyer's primary duties are to:

• Accept delivery of the goods upon shipment, when the invoice and the bill of lading are tendered to him (the bill of lading is deemed to 'represent the goods'). • Pay unloading costs to the extent that they are not included in the freight.

Cost, Insurance and Freight (CIF). This is the other well-known conventional delivery term and completes the trio of 'traditional' terms for exporters, but now having CIP (below) as the container traffic equivalent. On the principle of minimum responsibility for the seller, the insurance element within CIF is also minimal. The buyer should detail any wider insurance cover required in his instructions to the seller for incorporation in the contract.

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Under this term the seller's primary duties are to:

• Contract for the carriage and pay the freight to the named port of destination. • Deliver the goods on board. • Obtain any export licence and pay export taxes and fees, if required. • Contract for the insurance of the goods during the carriage and pay the insurance premium. • Furnish to the buyer the invoice, a clean bill of lading and a cargo insurance policy or certificate. • Pay loading costs. • Pay unloading costs to the extent that they are included in the freight.

The buyer's primary duties are to:

• Accept delivery of the goods upon shipment, when the invoice, the cargo insurance policy (or certificate) and the bill of lading are tendered to him (the bill of lading is deemed to 'represent the goods). • Pay unloading costs to the extent that they are not included in the freight.

Freight or Carriage Paid to (named point) (DCP). This is the container equivalent of the conventional Cost and Freight ((JFR).

Under this term the seller's primary duties are to:

• Contract for the carriage and pay the freight to the named destination. • Deliver the goods into the charge of the first carrier. • Obtain any export licence and pay export taxes and fees, if required. • Furnish to the buyer the invoice and usual transport document.

The buyer's primary duty is to accept delivery of the goods when they are delivered to the first carrier and when the invoice and, if customary, the usual transport document are tendered to him.

Freight or Carriage and Insurance Paid to (named point) (CEP). This is the container equivalent of Cost, Insurance and Freight (CIF).

The seller's primary duties are to:

• Contract for the carriage and pay the freight to the named point of destination. • Deliver the goods into the custody of the first carrier. • Obtain any export licence and pay export taxes and fees, if required. • Contract for the insurance of the goods during the carriage and pay the insurance premium. • Furnish to the buyer the invoice, usual transport document and a transport insurance policy or other evidence of insurance cover.

The buyer's primary duty is to accept delivery of the goods when they are delivered to the first carrier and when the invoice, transport document and, if customary, the usual transport document are tendered to him.

Ex-Ship (EXS).

The seller's primary duties are to:

• Deliver the goods on board the ship at the port of destination. • Provide documents to enable the buyer to take delivery from the ship (for example, bill of lading or delivery order).

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The buyer's primary duties are to:

• Take delivery of the goods from the ship at the port of destination. • Pay unloading costs. • Obtain any import licence and pay import duties, taxes and fees, if required.

Ex-Quay (EXQ). A distinction should be made in the contract between Ex-Quay (duty paid)' and 'Ex-Quay (duties on buyer's account)'.

The seller's primary duties are to:

• Deliver the goods on the quay at the port of destination. • Provide documents to enable the buyer to take delivery from the quay. • Pay unloading costs. • Obtain any import licence and pay import duties, taxes and fees, if required.

The buyer's primary duty is to take delivery of the goals from the quay at the port of destination.

Delivered at Frontier (DAF). You should note that terms such as 'free border' and 'franca border' are not the same as the DAF Incotenn.

The seller's primary duties are to:

• Deliver the goods cleared for export at the named frontier (or the named place at that frontier). • Provide documents to enable the buyer to take delivery at the frontier.

The buyer's primary duties are to:

• Take delivery of the goods at the named frontier. • Pay for on-carriage. • Obtain any import licence and pay import duties and fees, if required.

Delivered Duty Paid (DDP). This is the term that many traders have known as Franco Domicile (FD) and remembered because it meant delivering the goods to the customers' front door'. Application will vary as to whether seller/buyer is to be responsible for any payment of any value added tax (VAT) or local equivalent.

Under DDP, the seller has to:

• Deliver the goods at the named place of destination. • Obtain any import licence and pay import duties, taxes and fees, if required. • Provide documents to enable the buyer to take delivery of the goods at the named place.

The buyer's primary duty is to take delivery of the goods at the named place of destination.

Note: I should emphasise that the above is merely a shorthand description of the various Incoterms which you should in no circumstances regard as complete. It is essential to have access to Incoterms and to the comprehensive Guide to Incoterms which is also published by the International Chamber of Commerce (see Section 10). These publications list the total responsibilities of buyer and seller under all the terms which should be rigidly adhered to in all international contracts of sale incorporating them.

Below are graphical illustrations of some of the Incoterms which may help you to make sense of the main differences between them. The container equivalents FRC and CIF' are not included so reference should be made to the principal buyers' and sellers' responsibilities given above.

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Seller I Customs Terminal Customs Terminal DUrChaSer Air Cargo fka

FOA Documentation

Risks Coals

Air Cargo

at21111,

Zhissieu

Cargo Terminal Customs Cargo Terminal Purchaser

a rant, aa a t

All rnean&of transport

o Seller I CUstoin•

• RAIL 1)1

ExW Docum.n• xt.x. - • Coate

DDP Documentecion Risks Costs r•-•,_

Air transport

Land transport

litternal tonal boundary _

II AM

ii ..... ier . ...iv. .....eivroui

11 iiiii la Sla Ili Cinlem• "-ergo terminal Purchase

1111E1 13 •

i

ii 1,4

I I

POT! FOR . Document Ion X SW Coats

DAF Document Ion X Risks CPIS

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r

Critical point By critical point is meant here enerY clearly darned point where the Seller's obligalions cease and the PurChaSer's obligations start

the good.

Documentation Documentation necessary tot the Seller to be able to make the goods available in the Purchaser at the agreed alliedl point is obtained and paid for hy the Seiler If lie Purchaser 90 requires, the Seller shall, at the Purchasers risk and expenSe, provide an necessary assh StanCe lot the obtaining of the redraw re documentation lor transiting through Other Countries and or impart

DOC Negotiated agreement This indicates lhat the purchasing agreement shall Male, where aPPrer prrale, which documents Me Setter agrees lo obtain attire Purchaser's risk and expense.

Risks The danger of some event occurring winch can cause damage to. or loss ol. the goods is called Risk. Both Seller and PtlithaSef probeer ihemseives againsi me major part of the risk by insurance.

CDC Costs involve all Costs ()Vet and above those for documentation and the covering of risks. The purchasing agreement desires which Costs kir transfer of the goods are to be del rayed by Me Seller and which by the PurChaSer.

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Documentation Risks Costa

ExS

Sea transport Seiler I

if Cargo Terminal Customs

Customs Cargo Terminal Purchaser

asilli FAS

Risks Docuinantation

Costs

FOB Risks Documentation

Costs

Documentation X

Risks Costs

CFR

CIF Documentation X— X Risks X Ats/ine insurance, obtained by Seder

Costs X

Ex0 (ellabes on buyers tiO:Olief),.. (named port)

Documentation Risks Costs

EXO (dun Paid).-(named port)

Documentation r

Risks

Costs

=C Critical point By Critical paint is meant here every clearly defined point where the Seller's obligalionS Cease and the Purchaser's Obligations start

• The goods

Documentarian Documeniatron necessary for the Seller to be able to make the toads available to the Purchaser at the agreed Critical poini is obtained and paid tor by the Seller tithe Purchaser so requires. the Seller shall. at the Purchaser's risk and expense, provide all necessary assi-stance luster obtaining of the regursile dOCumeniatron for transiting through other counlries and tor import.

DOC Negotialed agree went This indicates that the purchasing agreement shall stale. where appro. plate, which documents the Seiler agrees to oblam at the Purchaser's risk and expense.

Risks The danger of some evenl occurring which can cause damage to. or loss ol the toads is caned Risk. Both Seller and PurchaSer prOleat themselve5 against the major pan of the risk by insurance

Coats involve all coals over and above lease for documentation and the covering or risks The purchasing agreement defines which costs lOr transfer of the Weds are 10 be del rayed by the Seller and *Inch by the Purchaser

4.5 Relating modes of transport to the appropriate delivery terms

• All modes of transport, including road: EXW Ex-Works, FRC Free Carrier (named point), DAF Delivered at Frontier, DC? Freight and Carriage (paid to ...), CIP Freight or Carriage and'Insurance (paid to ...), and DDP Delivered Duty Paid.

Rail transport only: FOR/POT Free on Rail/Free on Truck. The word 'truck' here relates to a rail truck. This term is not intended to be used for road transport even though there is wide acceptance of the word 'truck' as a road vehicle. (Neither is there any internationally-accepted term FOL Free on Lorry which I have occasionally seen in export documents.)

Air transport only: FOA FOB airport.

Sea transport only: FAS Free Alongside Ship, FOB Free on Board, EXS Ex-Ship, CPR Cost and Freight, CIF Cost, Insurance and Freight, and EXQ Ex-Quay.

ACTIVITY 8 Examine each of the above terms in relation to the passing of risk from exporter to buyer and in each case establish the responsibility for insurance cover for each section of the carriage, bearing in mind, of course, that insurance is not a legal requirement, merely a prudent safeguard against loss of or damage to goods. There is a graphic illustration of this for each term in Guide to Incoternu.

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Self-assessment questions

(a) Why are acceptable standard delivery terms of value to international traders?

(b) Why do Incoterms have to be revised regularly?

(c) Incoterms have been set out here in ascending order of responsibility for the seller. How can exporters use the more sophisticated delivery terms as a marketing tool?

(d) Why were new terms required for container and multi-modal deliveries?

(e) Are there specific delivery terms for specific methods of transport?

(t) Why should FOB terms not be used for container shipments?

(g) What are the methods of incorporating Incoterms in your export contractual arrangements?

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5 Export finance Mother book in this series gives you information on getting paid: Getting Paid: Managing your Money by Duane Hall. Here I intend merely to look at the legal aspect of the export transaction. I am using the term 'legal' unprofessionally as I indicated in the introduction. 'Legal' in this book means what the exporter should know about the law, not what an international trade lawyer is able to contribute.

In an earlier section we decided that an international contract of sale comes into existence when an unambiguous offer from you is accepted unconditionally by your buyer in the foreign market and some form of valuable consideration for the transfer of property in the contract subject matter, i.e. payment for the goods or services, is agreed.

So you are going to receive some form of valuable consideration for your exports. This automatically introduces the subject of Exchange Control. Controls still exist in Pakistan, as-in many developing countries and some-industrialised countries. You should check on these with the Exchange Control Department of the State Bank of Pakistan or with your own commercial bank.

ACTIVITY. 9 Obtain a copy of any current Pakistani regulations goveming the methods of payments prescribed by Pakistani law for exports from Pakistan. This can be obtained from the sources stated in the text above. It is absolutely essential that you adhere to your country's exchange control regulations, so read them carefully!

The word 'Consideration' mentioned before the activity implies that payment for the export of your goods and services need not be restricted to money. In some countries exporters are prepared to receive goods in payment, i.e. a form of countertrade. In Pakistan, countertrading is solely undertaken by the State Trading Corporations. Therefore I will not consider it in this book.

5.1 Methods of payment

You will find in practice that there are basically four methods of payment in international trade: cash with order, open account trading, collections (bills of exchange) and bankers' documentary credits.

Cash with.order

It is hardly likely in times of international trade recession that you will experience offers of cash with• order. Recession creates a buyer's market and most buyers are reluctant to part with payment before they have to.

However, [still come up against this from time to time and in this connection you should be aware of two legal aspects of the situation. The fast is that you must check that such a payment and the currency involved are acceptable from your exchange control point of view. The second is that you should beware of the travelling buyer who turns up with suitcases of actual cash. Such incidents are not unknown, but if you experience one be extremely careful for it can be that such a buyer may be transgressing his own exchange control regulations. If that is the case and you undertake the related trading you could find yourselves involved with officialdom in the country of import, which could adversely affect your future trading relationship with the market concerned.

Open account trading

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Open account trading

This is the simplest and cheapest method of getting paid but lacks any security of payment. The essential criteria for its use are that you are completely sure about (a) the solvency, (b) the honesty, and (c) the intentions of your foreign customer. This is the obvious method for dealing with old and trusted customers or for selling to your own subsidiaries in other countries.

The documents called for in your international contract of sale are forwarded to your customer accompanied with the prescribed invoice for the country concerned and your buyer pays at the time agreed in that contract, either on receipt of documents or at the end of an agreed credit period. Remember again that your payment must be received in a method acceptable under your exchange control regulations.

Collections (bills of exchange)

This is a method of payment which gives you a great deal of security. However, as we have to consider bills of exchange from a legal point of view, I feel it is wise to start with a definition.

In this connection, it is perhaps useful to refer to the English Bills of Exchange Act 1882, which is considered by many eminent legal people to be the best drafted Act of Parliament ever passed in the United Kingdom. As the United Kingdom and the Subcontinent had a shared history at the time this Act became law it is just possible that the English Bills of Exchange Act 1882 also finds its place within Pakistani law. This is something which you should investigate.

A bill of exchange is described in the English Act as 'an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future date a sum certain in money to or to the order of a specified person, or to bearer'.

You can see that this is a very precise definition. There are three parties to a bill of exchange: the drawer (you, the exporter), the drawee (your customer), and the payee (frequently your bank, but to your order). In accordance with the definition:

(a) there must be no conditions attached to the bill, such as 'if the goods arrive safely', etc.

(b) the bill must be written (typewritten is, of course, included in this)

(c) it must be addressed by 'one person to another' (person really means a contracting organisation: people, companies, partnerships, etc.)

(d) the bill must be signed by the drawer (you, the exporter)

(e) it must require the person to whom it is addressed (the customer) to pay on demand or at a fixed or determinable future time a sum certain in money, which means that from the bill itself both the time of payment and the exact amount of money payable must be capable of calculation - no approximations here

(f) the bill must be payable to or to the order of a specified person or bearer: once again, the beneficiary must be obvious.

A 'sight bill is one which your customer must pay upon presentation of it to him. In exporting we normally refer solely to documentary bills of exchange which are bills with the transaction documents (usually invoice, insurance and transport documents at least) attached. The importer will be given the documents to be able to obtain the goods in return. This is where you have security: no payment, no presentation of documents and therefore no right to the goods for your customer. But, as you will see from the

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defmition, a bill of exchange may be paid at 'a fixed or determinable future time'. This is where you are granting your customer credit so that he can sell the goods before he has to pay you. Such bills are known as 'time', 'term' or 'tenor' bills and are usually for multiples of 30 days, i.e. 30, 60, and so on up to 180 days.

Your customer will accept the 'time bill' by writing 'accepted' across its face and signing and dating it. When he has done this, he will be given the documents by the bank presenting the bill. This is usually your own bank's correspondent bank in the country of import. You will see from this that the security of payment lapses somewhat Your buyer has accepted your bill and agreed to pay at a 'fixed or determinable future time'. Now, suppose he does not! This is known as 'dishonouring' the bill.

If a bill of exchange is dishonoured by non-payment or, indeed, by non-acceptance and you wish to take legal action, the bill has to be 'protested', that is to say, noted by a notary public at the payer's (your buyer's) locality. Noting means that the notary public indicates on the bill the refusal to pay or accept at the time of such refusal and then initials and dates the 'note'. This is usually accepted by all parties to the effect that the bill has been dishonoured.

A word of warning here. In most countries you will find recourse to litigation an expensive operation. In some countries there is uncertainty about legal performance. With bills of exchange, you always have to instruct your bank - via a 'collection order' - about obtaining payment and giving authority regarding storage, insurance, etc. in the event that your goods are not taken up. Advice on this can always be obtained from the foreign section of your bank, which is accustomed to dealing with bills of exchange regularly. You can nominate a local representative in the importing country to act on your behalf in the event of dishonour. He is known as a 'referee in CASE' of need'. You must define his powers precisely.

Negotiabltinstrument: A fascinating legal aspect of a bill of exchange is that it is a document which can be negotiated, i.e. it is a negotiable instrument. This means that the interest in a bearer bill (one payable to bearer) may be transferred by delivery from one person to another. Interest in bills made out to or to the order of specified payees (exporters)tan be transferred by delivery of the bill plus endorsement (endorsing the value of the bill over to another beneficiary).

The fact that, legally, bills are negotiable instruments makes it possible for you to 'negotiate' accepted bills with your bank at current interest rates in order to improve your cash flow. Your bank then takes the bill and receives payment from your customer at the appropriate%time. You receive the value of the bill from your bank less a discount which the bank takes as payment for this service.

Rules for collections: Rules for the administration of bill of exchange transactions in the main trading countries are laid down by the International Chamber of Commerce's Uniform Rules for Collections (ICC Publication No.322) which came into effect on 1st January 1979. The rules are operated by all banks in 55 countries and by at least one principal bank in another 69. Exporters should read this small booklet and be well aware of its content.

Bankers' documentary credits

Administered efficiently, a banker's documentary credit can offer you the greatest security of payment in export trading after the completely secure method of cash with order. The legal principle for administering credits is known as 'the doctrine of strict compliance'. This doctrine states that you must comply strictly with all the terms of a letter of credit and that banks are entitled to reject documents which do not so comply or are tendered after validity dates and then refuse payment to you, the named beneficiary.

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Regrettably, it has been shown in many sophisticated exporting countries that in the region of 50% of all first documentary presentations to banks for payment against letters of credit are either inaccurate or incomplete. Thus the doctrine of strict compliance is something of which you must be constantly aware for the simple reason that if you don't get the documents right you won't get paid, at least via the credit.

For details of the operation of documentary credits see Duane Hall's book in this series, Getting Paid: Managing Your Money. Here, I shall define what a documentary credit is, list the varying types and explain how your acceptance of the credit commits you to operating in accordance with a published set of rules despite the fact that those rules have no legal significance in themselves.

First of all then, what is a banker's documentary credit? The accepted defmition is that it is an instruction by an importer (the applicant for the credit) to his bank (known as the issuing bank) to make money available to you, the exporter (the beneficiary), in your country directly or by using a bank in your country as an intermediary (called the advising and/or paying, negotiating or accepting bank according to the role it is intended to play), on presentation of specified documents evidencing shipment of prescribed goods within a given time limit

You will see from this definition how the documentary credit operation works. Your customer applies to his bank giving full details of the documents which he requires you to produce so that he can be sure that you have produced the right goods, they have been shipped and (usually) insured against loss of or damage to them in transit. You get the money if you adhere to the terms of the credit and to the accepted rules of credit operation and your buyer receives the documents through the banking system which enable him to obtain possession of the goods. Therein lies the security, i.e. he doesn't get the documents entitling him to the goods until you get the money.

I am sure you will already have had experience of documentary credit operations.

What are the accepted rules? Again we must consider the work of the International Chamber of Commerce (ICC). The ICC have prepared Uniform Customs and Practice for Documentary Credits and over the years, as with 'Incoterms', they have adjusted them to take into account developments in commercial practice. The latest issue of these rules, known internationally as the UCP', is the 1983 Revision which became effective on 1st October 1984.

At the time of writing, the 1983 UCP have been accepted by all banks in 81 countries and by at least one principal bank in another 63. , Such wide acceptance indicates that the majority of documentary credits issued have written upon them: 'This credit is issued subject to the Uniform Customs and Practice for Documentary Credits (1983 Revision, International Chamber of Commerce, Paris, France, Publication No.400) and engages us in accordance with the terms thereof.'

You will see from this that if you are accepting the credit as the named beneficiary you are becoming party to a document which has to be administered according to stated rules - the terms of the UCP. It follows, therefore, that you must be fully aware of these terms, which means you must study the UCP very closely. I recommend that you buy a copy of the UCP from the Pakistan National Committee of the ICC (see Section 10) and a copy of the ICC's Guide to Documentary Credit Operations (ICC Publication No.415).

Here I wish to bring to your attention brief details of the types of documentary credit which have emerged from commercial practice over the years. These are:

• The revocable credit. I do not advise your acceptance of such a document as this type of credit may be amended or cancelled by the issuing bank at any time without any notice to or consultation with you.

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• The irrevocable credit. This is an improvement. It constitutes a definite undertaking by the issuing bank which cannot be amended or cancelled without your agreement Thus, provided you adhere to the doctrine of strict compliance, you have the security of a bank agreeing payment.

• The confirmed irrevocable credit. This is even better for you. The word 'confirmed' means that the bank in Pakistan which advises you of the credit has added its definite undertaking to pay to that of the issuing bank. Now, providing you keep to the rules, you have the security of two banks undertaking that you will be paid.

Another word about the doctrine of silt compliance. I recommend the adherence by you to the following actions in connection with documentary credits in order to ensure that you get paid:

You must examine every word of the credit immediately upon receipt.

• If yon lc:now that it will be impossible for you to keep to any of the credit terms or with any section of the UCP, you must telex your buyer forthwith for amendment of the credit.

• You must note and adhere precisely to the expiry date and conditions specified in the credit.

• Only in the last possible resort should you issue an indemnity to your paying bank against payment. It is far better to seek agreement on any uncertain point with your buyer.

Remember; bankers deal in documents - not goods.

It is important that you realise that bankers' documentary credits are very sophisticated documents calling for very serious study. A banker friend of mine recently began a public lecture on the subject with the words: 'The way of documentary credits is a road strewn with banana skins'.

ACTIVITY 10 Practise preparing sight and time bills of exchange and check that you have followed every requirement of the definition given above. Additionally, obtain a copy of the ICC's Uniform Customs and Practice for Documentary Credits (1983 Revision) and read every word. It is.quite short, but very important.

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5.2 Summary

Here, briefly, are the legal implications of export finance.

You must be aware of and adhere rigidly to the Pakistan Exchange Control Regulations.

If you receive cash with order ensure that your buyer is not using this method to overcome his own country's exchange control regulations. You could experience problems.

In law, bills of exchange have a very precise definition. Ensure that the bills you draw follow the definition requirement.

If a bill of exchange is dishonoured by non-payment or non-acceptance, the bill must be 'protested' if you wish to take legal action. Protesting is by having the bill 'noted' by a notary public.

Legal action in some countries is very expensive. You should seek advice from your bank.

Bills of exchange are 'negotiable instruments', which means that you can negotiate an-Ppted bills with your bank to improve cashflow.

Bill of exchange operations are widely controlled by the International Chamber of Commerce Rules for Collections.

The legal doctrine of considerable importance relating to bankers' documentary credits is the 'doctrine of strict compliance'. This means precisely what it says. If you do not comply strictly with the terms of the credit and the rules under which credits are issued you will not get paid under the credit.

Bankers' documentary credits are controlled virtually worldwide by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits (1983 Revision). You must be thoroughly conversant with this publication.

Finally, remember that with documentary credits bankers deal in documents - not goods.

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Self-assessment questions

If you don't know the answers to any of these questions pleace look b2 k through Section 5. These details are the key to getting paid, which is the main point of exporting after all!

(a) What are the four basic methods of payment in international trade?

(b) What problems exist, if any, with receiving cash with order?

(c) When would you offer open account terms?

(d) What is4he difference between 'sight' and 'term' bills of exchange?

(e) What security of payment relates to a documentary bill of exchange transaction?

(f) How can an accepted bill of exchange help your cashflow?

(g) What do you understand in documentary credit payments by 'the doctrine of strict compliance'??

(h) Why should you refuse to accept a revocable credit in which you are named as beneficiary?

(i) What would you do on receipt of a documentary credit in which you are named as beneficiary if you find you cannot adhere to one or more of its terms?

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6 The documentation of international trade What I propose to do in this section is to examine a typical international trade contract from the documentary point of view. The documentary process ranges from registering as an exporter, right through the export transaction to the paperwork on your foreign exchange earnings.

The rust point to make is that export documentation is complex; its preparation can be laborious (although there are many modem systems which simplify documentary production); and it demands accuracy and great attention to detail. It is seldom highly considered in the area of export practice but its importance should never be underestimated. An exporting company is frequently judged by the efficiency and accuracy of its documents. And bad documentation invariably means fmancial loss.

6.1 A step-by-step guide to export documentation

So, here goes with the first thing you must do, which is register as an exporter, right through to the rebates you can receive for successful exporting. On page 63 is a checklist for you to make sure you have carried out each stage satisfactorily.

1 Registration as an exporter - In Pakistan, international traders have legally to register firstly with their Chamber of Commerce and Industry or Trade Association and then with the Chief Controller of Imports and Exports, who has offices throughout the country.

2 The enquiry - The first piece of paper likely to be received in the export contract is an enquiry from the foreign potential buyer.

3 Quotation - After the enquiry has been received you will prepare a quotation in accordance with your potential customer's enquiry and with the proposed delivery term. Your quotation should be given a validity time as inflation may affect it quickly.

Three other documentary exercises need to be undertaken at this stage: (i) Will the sale of your products to a foreign customer be subject to an export licence and, if so, will this be forthcoming? (ii) You must asePrtain if your customer will require an import licence and whether or not this will be forthcoming. (iii) Your own exchange control regulations will probably require you to provide your potential customer with a pro forma invoice giving full details of the proposed transaction and the currency in which payment will be made.

4 Firm order - In a normal transaction, your buyer will approve (or negotiate until he does approve) your quotation and place a firm order.

5 Order acceptance - On receipt of your customer's firm order, you should send an order acceptance at the agreed price, terms of sale and delivery. At this stage an international sales contract has been concluded.

6 Customer acknowledgement - I recommend that you ask your customer to acknowledge your order acceptance so that both you and he then know that you are in a contractual situation.

7 Advice to shipping department - In many exporting companies there are frequently three sections concerned with export contracts: the export sales department, the shipping department and the production unit. This may not be the case in your particular organisation, so the following information must be adjusted accordingly.

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The sales department will have fulfilled its responsibilities by obtaining the order. It is now up to the shipping department to ensure the efficient processing of it. Thus at this stage a copy of the order and associated correspondence must be passed to your shipping department for action.

8 Works order and inspection documents - It is now up to your shipping department to advise your production section of the order to ensure manufacture is organised to meet the agreed delivery date. Many countries of the world require pre-shipment inspection. For each consignment involved a document known as a Clean Report of Findings attesting to satisfactory quality, quantity and price will be required. Obviously, inspection by the appointed inspection agency will have to be completed before the goods are packed for export.

9 Qualifying certificates - At this stage, too, your production manager must be advised of any special certification the importer has requested in connection with the goods on order. Numerous types of qualifying certification exist in international trade. Certificates of Quality, Test, Analysis, Purity, Health (livestock, plants and foodstuffs), National Registration (pharmaceuticals and pesticides), Valuation (secondhand machinery), and Medical, Phytosanitary and Sanitary Certificates are typical examples.

Some of these certificates may well have to be legalised by the relevant consulate or by your local chamber of commerce authorised for this purpose.

10 Liaison with sales department - I recommend a form of continuous liaison by internal memoranda between your shipping and sales departments. From the legal point of view you have contracted to provide specified goods or services to your buyer and supply them under agreed delivery terms by a certain date. If you do not do all these things then you might leave yourself open to claims for damages or your buyer may reject the goods when they are actually supplied.

Now, as you probably will agree from personal experience, few traders wish to resort to the law. Most companies are merely interested in obtaining the products they order, selling or using them for profit, and leading an existence free of legal complexities. So the rule here is to get your sales department to keep your customer continuously aware of the processing of his order. If problems do arise, an informed customer is far more sympathetic than one kept in the dark until the last moment.

11 Arranging transport - When production is proceeding according to the delivery plan it is necessary for you to consider the international transport of your contract. Who will actually book the cargo space is dependent upon the agreed delivery terms (refer to Section 4). If it is your own responsibility, it is now for you to decide whether you will arrange transport yourself or pass this responsibility to a selected freight forwarder.

If it is your buyer's duty to arrange transport (for example, under an orthodox FOB contract) you must now advise him of the date the goods will be ready for movement

If it is your own responsibility to organise transport, you should now book space with the appropriate transport medium you intend to use, i.e. sea, air, road or rail or a combination of two or more. Shipping companies have their Export Cargo Booking Forms and airlines frequently provide Letters of Instruction for Issuing Air Waybills. If road or rail carriers are to be used, these should be contacted and advised by letter (unless they advise you of any of their own space booking forms which require completion).

12 Freight forwarders - If you decide to appoint a freight forwarder to look after the documentary, insurance and transport details of your consignment, you will enter into a contract with, him and you must study this and his Standard Trading Conditions very carefully. It is essential when working with freight forwarders for you to bring them into the operation as quickly as possible and to provide them with complete information on your contract via their Export Cargo Shipping Instructions.

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13 Advice to buyer - If it is your duty to arrange transport, either by yourself or through your freight forwarder, your customer in the foreign country will want to know the probable date of arrival at delivery point from where he will assume responsibilities relating to the goods. So you advise him of your transport arrangement.

14 Cargo insurance documents - I shall be dealing with cargo insurance in the next section. Here I will consider only your responsibility and the relevant documents.

Your responsibility to insure under various delivery terms was considered in Section 3 under The passing of risk'. You should reread that section now.

From the legal point of view, of course, there is usually no obligation to insure, but prudent traders always ensure cover against loss of or damage to goads in transit. In some countries, such as your own, regulations exist requiring all imports to be insured by resident insurance organisations. You will have been advised of this by your customer if such regulations exist in his country. If Incoterms are used as I have recommended, there is a contractual requirement regarding insurance cover. I mention this point specifically here because there may be some areas of risk where your liability is not obvious. I shall return to this later.

The insurance documents to note are Facultative Policies for single consignments, Open Contracts for continuous sendings, Certificates of insurance indicating cover under open contracts, and Cargo, Strikes and War Risk Clauses which attach to the cover.

15 Credit insurance documents - You are not legally obliged to cover your exports against non-payment by the buyer. However, it is prudent to do so as non-payment may be due to political or commercial reasons: political, because legal decisions imposed by the buying country may make payment impossible; commercial, for such situations as buyer insolvency, etc. The document concerned here will be your Credit Insurance Policy. Remember, details of the Pakistan Export Credit Service should be obtained and the Export Promotion Bureau can provide advice on this.

16 Customs entries - Pakistani regulations, like those of other countries, require you to register your export consignments with customs. The relevant form is Form E (see example overleaf). This is legally required usually for two reasons: (1) to provide national international trade statistics; and (2) to enable customs authorities to control exports from the legality point of view.

17 Port Shipping Notes - In international trade there is usually a requirement for consignors to prepare approved Shipping Notes to advise port and airport authorities and container reception depots of the goods they can expect to receive, details of voyages and any particular stowing or handling requirements. It can also serve for the authorities to calculate port rates.

18 Dangerous Goods Notes - Some goods exported by sea and air can, by their very nature, endanger ports, transport vehicles and the crews. You will not be surprised, therefore, to learn that the International Maritime Organisation has classified dangerous goods in its 'International Maritime Dangerous Goods Code Book'. In the case of air cargo, the International Civil Aviation Organisation have produced Technical Instructions for the Safe Transport of Dangerous Goods'. In practice, airline operators also tend to consult the International Air Transport Association's Dangerous Goods Regulations'. You should consult your port authorities and air freight agents or airlines for advice regarding notification of the movement of any dangerous goods you may be exporting.

19 Transport documents - I shall have more to say about transport documents in the section devoted to International Transport From a legal angle, it is important for you to note that a bill of lading is a document of tide, and as such is quasi-negotiable. (I will explain this in a moment) Goods will not be presented to consignees without the surrender of an original bill of lading. The bill of lading is also a receipt for your goods and provides evidence of your contract of carriage agreed with the shipowner.

57

ORIGINAL

Serial No. NB?

FORM E

(for. Exportsf

TO BE SUBMITTED TO THE CUSTOMS/POST OFFICE

Declaration to be furnished by exporters pursuant to section 12(1) of the Foreign Exchange Regulation Act. 1947 read with government notifications No. 1(6)-ECS/48

and No. 1(7)-ECS/48 both dated the 1st. July, 1918.

if the applicant Is income tax payer, please indicate :- Identity

G. I. R. No Card No

and the income Tax Circle Place of Issue...••• .• ------------------ ••• ---- If the applicant is not an Income tax payer. Date of Issue the word 'NW should be clearly stated., of the authorised representative of the exporter

signing the form. Name and address of the Authorised Dealer Documents covering the goods declared below Including full set of bills of lading, railway receipt and/or

other documents of title to. the goods must be passed through an Authorised Dealer In Foreign Exchange. In no . case may they be despatched direct without prior special/general autheriti in writing of the State Bank of Pakistan.

An Incorrect declaration on this form constitutes an offence under Foreign Exchange Regulation Act. 1947(VII of I947).

IpNe, the undersigned hereby declare that I/VVe am/are the sellers/consigners of the goods described below In respect of which this declaration is made out and that the particulars given in the following columns are true and that the invoice value declared in column 3 in case of firm contract Is full 'value as contracted with the buyers/in case of consignment sale is a fair value of goods Which are being shipped on consIgnment,sale. I/We undertake that 1)Wc shall deliver to the bank mentioned above the foreign exchange proceeds resulting from the export of these goods within four months from the date of shipment/despatch. In the eventrof consignment sale we undertake to furnish to the above bank a fully documented account sale certified .by the consignees/Chamber of commerce of the country of import or any other documents required by the State Bank of Pakistan. IfWe declare that nothing material of relevant to the Information given in thls.Form has been omitted or supressed and whatever is stated herein is true to my/our knowledge and belief. IfWe declare that l/We am/are neither connected with the Importers/consignees abroad directly or indirectly nor do IfWe have any financial or other interest in the importers/consignees abroad. I/We un-dertake to submit the triplicate and quadruplicate copies of this form to the Authorised Dealer whose name appears above within fourteen days of shipment alon with documents for negotiation/for sending on collection

GOODS with lull details and quality II id•ntinahl.

with th• Market Reports

QUANTITY Bales, Bundles.Pines Ilausids. Tem Lb.. Rms. Cases •tc.

invoiceOslue of goods (Stare currency 4

terms I.e.CINC & F /Foal

Terms of Sale i.e. Firm

Contract of ConeIgnm•nt

Sale

Port/Station in() country

of destination .

Name and Aden.* of the Importer)

consignee

1 2 3 56

TERMS co

.1.14,C

--C—t4P—

Name of carrying Steamer/Air Coffi Track Co./Railway/

Post Office

mar Biller LadingfAirway Bill/Railway Rec•Ipt, Post Parcel Receipt) Truck Receipt No.

yards declared on document

lined in column II

Port of shipment/ Poet Office of

despatch

' . Land Cuttom . po„

7 8 9 10 11

,._..

Name (Block Letters)

Full Address.._

.. Phone No

.CCII&E Export Reg. No. dated _ .

(Stamp & Authorised Signature of Exporter)

CERTIFICATE OF AUTHORISED DEALER

Certified that:the above exporter(s) is/arc known to us, that he/they Is/are bonafied businessman/business-men In Pakistan and that he/they has/have 1112 de arrangements with us for the realisation of the export pro-ceeds of she goods declared on this form within four months from the date of shipment In accordance with State Bank's Notification No. F.E. 5/72-SB dated the 27th December. 1972 and that we are satisfied with the said arrangements. We have also satisfied ourselves about the bonafldes of the importers/consignees abroad and their credentials etc. 'We undertake to ensure that export proceeds against shipment on firm contract shall be received by us within the stipulated period of four months. In the event of non compliance due to reasons beyond our control we shall furnish to the State Bank of Pakistan a full explanation as to the reasons and circumstances resulting in our inability to comply. 'We 'undertake that in the event or non-real I sacion of export proceeds against shipment on consignment sale within the stipulated period of four months. we shall obtain from the exporter(S) and furnish to the State Bank of Pakistan a full explanation as to the circumstances resulting in non realisation. We further undertake that in the -event of short realisation, we shall obtain from the exporter(s) and furnish to the State Bank of Pakistan a fully documented account sales certified by the consignees Chamber of Commerce of the country of Import. *(Strike out the portion not applicable and authenticate with' Initials).

I I I-I I I-I 1111

Date (Signature and Stamp of Authorised Dealer)

TO BE COMPLETED BY CUSTOMS/POST OFFICE

I. Month in which this item is included in the Customs lPost Office Return ....... 2, Value assessed by the Customs/Post Office,

3.. Shipping Bill/Airway Bill 'Post Parcel Receipt No. _ ...... ......... ..... ......dated

.........

SEAL (SIGNATURE OF CUSTOM OFFICER)

58

Being a document of title means that whoever 'owns' the original bill of lading for presentation to the shipowner at port of destination can obtain possession of the goods. You will probably require a little more explanation of the 'quasi-negotiability' of bills. When a bill of lading is made out 'to order', interest in the bill can be transferred by endorsement thus giving 'tide' in the goods to somebody other than the original consignee. Bills made out 'to bearer' can also be transferred to new interests. This is how goods can change hands on the high seas. However, bills can be prepared specifically to a particular person and not made 'to order'. In this case there is no negotiability; these are sometimes called 'straight' bills of lading.

All the other transport documents in international trade do not have the characteristic of being documents of title. When you send goods by air you receive an Air Waybill; S waybills are not negotiable documents. The goods you send by road or rail are no doubt covered by Consignment Notes. These are, of course, evidence of receipt of your goods for carriage and the documents do provide details of the contract of affreightment - but they are not 'title' to possession of the grinds involved.

Shipowners these days tend to feel they are being put into a special and rather onerous position because their transport documents are documents of title and other carriers are permitted to deliver goods into the hands of named consignees merely by identity evidence - not having to produce original title documents. Shipowners have to produce bills of lading if shippers so demand as it is their duty to do so under international conventions which are customarily incorporated into countries' legislations. If, however, shippers do not insist upon bills of lading, shipowners today are tending to supply Liner Waybills or Data Freight Receipts, which are virtually the equivalent of consignment notes.

If you ever have crension to charter a complete vessel for the shipment of your goods to a specific destination, the contract here is known as a Cizarterparty.

The documents you require if you have occasion to despatch goods by mail will be advised to you by your nearest major post office.

20 Packing lists - At the transport stage you should investigate any requirement for the preparation of packing lists. You might have to supply them against documentary credits; they may be specially called for by your foreign customer; and, if your consignment consists of more than one packing case, packing lists permit customs officers to spot-check individual cases.

21 Invoices - We have already considered pro forma invoices (3) above). Now we have to look at the need for commercial and consular invoices. Most countries of the world have regulations calling for specific data to be supplied in commercial invoices for imported goods. Data customarily required includes: details of exporter, consignee and buyer (if not the consignee); tariff number of orals exported; commercial references; country of origin of the goods; terms of delivery and payment; transport vessel; ports of loading and discharge; marks and numbers of packs; number and kind of packages; description of goods; gross weight; cubic capacity; specification of commodities; quality; unit prices; total in stated currency; name of signatory, place and date of signature; and a certificate to the effect that 'this invoice shows the actual price of the goods described, that no other invoice has been or will be issued, and that all particulars are true and correct'.

As variations of invoice content are prescribed by many countries, obviously you will not be in a position to know the regulations of all countries of the world. This need not cause you any concern because publications do exist to advise on the subject. The best one that I know of is Croner's Reference Book for Exporters (see Section 10), which is published in loose-leaf form and up-dated monthly.

Consular invoices are required today for only a very few markets such as the Dominican Republic, Honduras, Panama and Paraguay. Special Consular Forms are required for some markets such as the Philippines. You can always obtain full details from the nearest relevant consular office.

59

22 Certificates of origin - You will readily understand that every time countries decide to give preferential tariff treatment to goods of certain other countries, the legal aspect of the precise origin of the goods concerned becomes important So, in support of invoices for numerous world destinations, provision of Certificates of Origin, Certificates of Value or Combined Certificates of Value and Origin is compulsory for tariff, import control and other reasons (see example below).

Pakistan enjoys preferential treatment for imports into European Community Member States under the Generalised System of Preferences (GSP). GSP documents are issued by the Pakistan Export Promotion Bureau after your completion of an application form.

Cbamber of Comment & 3inbinarp Gram "Chanicomind

226091 to 226095 Telephones... 225435 to 225439

Telex :23613 KCCI PM.

P.O. Box 4158 AIWAN-E-THARAT ROAD

off Sahrah-e-Liaquat KARACHI 2

CERTIFICATE OF ORIGIN

Date

Marks 4, Number Numbers of Packages D.ESCRIPTION Country of Origin

PAKISTAN

—

Shipped/Booked per

Shipped/Booked by M/s

Shipped/Booked to M/s:

S. B./B. L/R. It. No Date

We hereby declare that the statements repirding the above described articles are true and correct in the particulars.

Declarer

K.C.C. The above Declaration is verified by the Chamber of Commerce & Industry.

for Secretary

60

23 Legalisation and certification - Frequently in international trade, documents to be sent forward to export customers requite consular legalisation or chamber of commerce or other certification. The certification is usually related to origin of goods and the certifying authorities add their confirmation to your origin statement after investigation.

24 Payment for exports - We have already considered the various methods of payments for exports. Open account transactions are paid upon presentation of Commercial Invoices. For collections, as already explained, the appropriate pieces of paper are Bills of Exchange. Banker's documentary credit transactions revolve around the terms of the Letters of Credit involved. Here you must constantly bear in mind the doctrine of strict compliance that we discussed in Section 5.

25 Advice of documentary distribution - It may be necessary for you to advise your foreign customer, your local agent and your bank of the distribution of the documents relating to a consignment.

26 Commission payment - Under your agency agreement you have agreed the commission payable to your agent for business introduced by him. Now that you have received payment, you should advise your agent of his entitlement by a Commission Credit Note.

27 Export rebates - When goods are exported they ocensionally contain goods upon which duties or taxes have already been paid. Now that the goods have been despatched and payment has been received, you should find out whether you are entitled to any rebate payments.

28 Foreign exchange earnings - Forms AE2 and 13 are required (see example overleaf). In this connection you should consult either your bank or forwarding agent.

29 Textile exports - For textile exports where quota allocations exist you should consult the Export Promotion Bureau and your Trade Association.

As I said earlier, export documentation is complex - but it is important that you get all of it right. Inaccurate or incomplete documentation can delay your being paid, can hold up goods in foreign customs with storage expenses incurred, and will always create unfortunate customer relationships. Good documentation usually means efficient exporting. And it is not as difficult as it might appear when you see it all for the first time. If you are systematic and work through the checklist on page 63 - and complete the forms carefully - then you will rapidly get to know the system and find that it becomes much more straightforward.

6.2 Summary

As a summary, there is a checklist on page 63 of an export transaction's documentary requirements. Every document has its own legal implication relating to the international sales contract, your own company accounting, the safe movement of goods, importing into foreign countries, exporting from your own country, insuring goods and getting paid. Examine every documentary step listed above and relate the situation to your particular products.

61

• Central Excise Series No. 87

A. E. 2 No. ( Rules-12-A )

APPLIC_TiON for Export of Goods in which exciseable goods are used under claim for

rebate of excise duty Place: Kara chi Date :

To. The Superintendent C.E. & L.C., KARACHI.

1/We purpose to export the undermentioned consignment to by Sea/Land/Parcel Post.

1. Description of goods:

2. Number and weight of Packages •

3. Marks & Numbers:

4. Quantity:

5. Valle:

6. Place of Storage:

7. Date and time to be removed for export:

8. Number and date of notification under which rebate is admissible:-

9. Rate of rebate •

10. Amount of rebate due:

1. Source from which the exciseable goods used in the manufacture of goods to be exported

were obtained:

For

Signature

Certified that the goods confirm to the goods mentioned in Notification

No dated andthat the packages have been sealed

by me -witti the Central Excise seal.

Place KARACHI of Central Excise

Date and Land Customs

with Official Seal.

Certified that the above mentioned consignment was exported on

under Export Application/Shipping Bill dated Customs officer with Official Seal

Place KARACHI

Date

Rebate of Rs (in words)

1/We attach a copy of Shipping Bill/Export application certified by the proper Customs officer. For

Place KARACHI

Date Signature of the applicant

62

Checklist of documentary requirements for export

1 Registered as an exporter

2 Enquiry received

3 Quotation prepared and sent

4 Order received

5 Order accepted

6 Customer acknowledged order acceptance

7 Shipping department advised

8 Works and Inspection Order issued

9 Production manager advised of any Qualifying Certificates

10 Sales department keeps buyer fully informed of order progress

11 Cargo space booked

12 Freight forwarders (if used) advised

13 Buyer advised of transport arrangements

14 Cargo insurance arranged

15 Credit insurance arranged

16 Customs Entry (Form E) prepared

17 Shipping Note prepared

18 Dangerous Goods Note prepared

19 Transport documents received

20 Packing lists made out

21 Invoices produced

22 Certificate of Origin and GSP documents obtained

23 Any necessary legalisation or certification organised

24 Payment documents: Bills of Exchange drawn or Documentary Credit advice received

25 Documentary distribution advice sent if necessary

26 Commission credit note despatched

27 Export rebate forms completed

28 Foreign exchange forms AE2 and D dealt with

29 Textile exports - quota allocation advice sought from Export Promotion Bureau

If your products need export licences, this, of course, is an additional requirement.

63

Self-assessment questions

(a) When do you regard yourself as being in a contractual situation with your foreign customer? What documentation will have been issued?

(b) How do'you advise your production units of details of export orders?

• (c) Do any of your products call for specific certification to assure your buyers and their authoritiesthat your goods are valid for entry and sale in the importing country?

(d) If you use freight forwarders, have you studied their standard trading conditions?

(e) What is the association between your agreed delivery term and your responsibility for arranging insurance and/or transport?

(0 In cargo insurance, what is the difference between a facultative policy and an open cover?

(g) Why does a bill of lading differ from an air waybill or an international consignment note?

(h) What is the reason for the existence of Dangerous Goods Notes?

(i) What are the usual reasons for the requirement of Customs Entries?

(j) Why are Certificates of Origin required?

(k) What forms are required in Pakistan to obtain any available export rebates and to register foreign currency earnings?

64

7 Cargo insurance So far we have looked at the legal approach, from the exporter's point of view, of distribution, contracts of sale, delivery, methods of payment and documentation. I hope it has become apparent that, although you will never be expected to be as knowledgeable as an international trade lawyer, it is essential that you understand something of the legal aspects of all the actions expected of you as an exporter.

Cargo insurance is a first-class example. There is no general legal principle which says that all international traders must insure their cargoes. However, the marine insurance industry operates in accordance with certain fundamental principles which are usually incorporated into national legal systems.

Some countries establish by law that all imports into their economies are insured by their own insurance industries. This is the eqse in Pakistan.

In this section I purpose to indicate the legal aspects of cargo insurance, which you should understand in order adequately to insulate your company from financial losses due to loss of or damage to cargo in transit.

In general. From the legal point of view, points of marine insurance which you should always consider are:

• The value of the goods in your marine insurance contract (with the buyer's anticipated profits included in cases where the policy is to be assigned by endorsement when the risk passes from you to your customer).

• The points between which the goods are to be insured.

• The time for which the goods are to be insured, i.e. when does cover begin and where and when will it terminate?

• The risks which you wish to cover; and here you must remember that a risk is a fortuitous event- not a certainty!

Whether or not transhipment is involved in the transit.

The insurance documents (policies or certificates, cargo clauses).

Accurate specification of the goods.

• Insurable interest in the goods (see below - as the insurer, you must have such an interest).

• The form of transportation.

• The method of making your claim.

Responsibility to insure. We have already ascertained that responsibility for accepting the risk of loss of or damage to gonds in transit varies according to the form of delivery terms accepted by you for contracting with your foreign buyers. I dealt with this in Section 3 under the heading 'The passing of risk'. You should consult that section again at this stage and note the points where risk passes from exporter to buyer under the various Incoterms. You will remember that if Incoterms are related to the delivery term in your contract, you will be contractually responsible for the seller's duties, as stated, for the particular delivery term you are adopting.

65

Under certain terms, CIF and OP for example, you will be responsible for arranging the marine insurance, but your policies must be 'assignable'. This means that after the point where risk passes from you to your customer, your buyer will be responsible for making any insurance claim so the policy must be capable of transfer to him from yourself at the appropriate stage.

7.1 Fundamental principles

The main principles of marine insurance are: utmost good faith, insurable interest, indemnity, proximate cause, subrogation and double insurance. Let me explain simply what these mean as they are most important.

Utmost good faith. This is often known by its Latin name of uberritnae fidei. It means that during the time that you are covered by your marine insurance policy, you must advise' your insurers of all circumstances that are material to the risks to your goods. A material circumstance has been described by one cargo specialist as 'one which would affect a prudent underwriter in determining the acceptance of the risk and his judgement of the premium to be charged'. So, if you are insuring your export cargoes, keep your insurers constantly informed. Incidentally, if you use an insurance broker this applies to him as wellt.as a broker has the same responsibility to the insurers as you have.

Insurable interest. It is generally accepted as a legal principle that you as 'the assured' must have an 'insurable interest' in the goods insured at the time of loss or damage in order to make a claim. A person with an insurable interest is anyone who is likely to suffer a loss if the insured property is lost or damaged or anyone who may incur a liability in respect of the goods concerned. Without such an interest in the goods at the time of loss or damage, you are not entitled to claim against your policy.

Indemnity. This principle means that you cannot recover more from your insurers than the actual loss that you have suffered. Although this principle is actually acted upon, there are some occasions when amounts greater than your actual loss will be payable. One instance of this relates to 'valued policies' whereby you cover your buyer's anticipated profits by a percentage addition, for example in CIF and UP contracts.

Proximate cause. In marine insurance law the insurer is said to be liable for 'any loss proximately, caused by a peril insured against'. As far as you are concerned, this means that if you intend to claim for loss of or damage to goods under your policy, the loss or damage must have been caused by a direct and immediate consequence of a risk you have insured against - not some remote consequence of such a risk.

Subrogation: This is a principle which stops you from being paid more than once for the same loss. Take as an example a claim for damage or loss caused by an admitted act of negligence by the carrier. If you claim from your insurers, under this principle you cannot benefit twice by claiming from the carrier as well. After you have been paid by the insurer your interest in claiming from the carrier passes to your insurer: you 'subrogate' your rights to the payment from the carriers to your insurers.

Double insurance. Once again I shall have to describe this fundamental principle by reference to English law, which states that the insurable value of goods allowed by the Marine Insurance Act is 'the prime cost of the property insured, plus the expenses of and incidental to shipping and the charges of insurance upon the whole'. In simple terms what this means is that you cannot insure the same thing twice. If you ever become aware that two or more policies have been taken out on the same shipment by you or on your behalf you should inform your insurers immediately and adjust the cover. You would not lose all your cover but them could be complications.

66

7.2 Cargo insurance and bankers' documentary credits

In the section on export finance I have pointed out that most bankers' documentary credits are subject to the International Chamber of Commerce's publication No.400: Uniform Customs and Practice for Documentary Credits (the UCP).

If you are acting as a beneficiary of a letter of credit issued subject to the UCP, it is important for yeti to know the UCP Articles 35 to 40 which concern themselves with insurance. These articles state, amongst other things, that the documents must be precisely as called for under the credit and must be effective at the latest from the date of loading goods on board or delivered into the charge of the first carrier; the cover required must be stated exactly according to the credit; and the insurance must be in the same currency as the credit.

Claims. The documents you should produce to support any claim you make against your insurance cover are: the insurance document; your invoice; your bill of lading, consignment note or waybill; the survey report you have prepared in accordance with the terms of your policy; and a copy of the claim you must make against the carrier who had charge of the goods at the time of the loss or damage and a copy of his reply. To claim successfully you must be sure to provide all the information your insurance company requires.

General aierage. In marine insurance the word 'average' merely means 'loss'. A general average act occurs when an emergency is declared by the captain of the vessel and consequential loss of cargo ensues or the carrier incurs an expense in order to save the ship and the remainder of the cargo. The 'sacrifice', as it is temied, is made for the benefit of all and, therefore, all parties to the particular incident - a 'marine adventure' in insurance terms - are required to make rateable contributions. The laws on general average differ from nation to nation but the International Law Association has drafted standard rules which are known as the York-Antwerp Rules 1974.

7.3 A final point

Although this last point really has no legal significance for you, I regard its inclusion as essential because it can be very important to your profitability.

There are occasions when it may appear that you have no reason whatsoever to insure your cargoes, for example, after the goods have crossed the ship's rail in FOB and C,FR contracts. However, the possibility always exists that your buyers may not take up your goods at destination, in the case of a falling market, for instance. The interest in the goods might consequently then revert to you with them stranded at a foreign port and possibly deteriorating.

The insurance market covers this situation by what is known as 'seller's interest' or 'contingency insurance'. You should consult your insurers about this and, of course, always examine every one of your shipments from your own factory right through to destination to see that you are covered against any loss or damage under any eventuality. Under an FOB contract you, the exporter, are not required to insure. However, the risk in the goods is for you until they have crossed the ship's rail. Look at all the delivery terms you use, note the transport sections where you are at risk and insure accordingly.

67

7.4 Summary

The insurance of export cargoes is essential to avoid financial loss due to loss of or damage to cargo in transit.

The responsibility to insure is related to the delivery term agreed in the international contract of sale.

Certain fundamental rules operate in marine insurance. You should be aware of those described above as they must be acted upon in all your marine insurance dealings.

Specific regulations exist regarding cargo insurance documents to be presented against bankers' documentary credits. These are defined in the ICC publication Uniform Customs and Practiee for Documentary Credits.

Specific decuments are required to be submitted in support of claims.

A 'general average' is declared when certain cargo is lost or damaged in an emergency in order to save the ship and the remainder of the cargo. All cargo owners make rateable contributions.

Always examine the entire transport route of your exports from your premises to those of your buyer:. If it is your responsibility to insure, you do. If it is not your responsibility to insure but, there are instances where your goods may remain at your risk, consult your insurer or broker about 'seller's interest' cover.

Self-assessment questions

(a) Whattdo you understand by 'utmost good faith'?

(b) What is meant by 'insurable interest'?

(c) Is it permitted under a policy of cargo insurance for you to be compensated for loss or damage by both the shipowner and the insurer and thus be paid twice for the same claim?

(d) Where would you look for instructions regarding marine insurance documents which you will have to present to your bank as a beneficiary of a documentary credit?

(e) What documents will you have to present to your insurers to support a claim for loss or damage irr transit?

(f) What do you understand by 'general average'?

68

8 International transport An export contract by definition means an agreement between a party in one country to supply goods or services to a party in another country under agreed terms and conditions. Thus, where goods are concerned, they invariably have to pass from one country to another. International transport is, therefore, a significant aspect of virtually all export contracts.

International transport can be by sea, air, road, rail, and, in the case of small consignments or parcels, by post.

In this section, we will look at the legal aspects of international carriage. More detailed advice on transport itself is given in James Molloy's book in this series, International Transportation and Physical Distribution.

8.1 Sea transport

As we have already discovered, the terms of your contract of carriage of goods by sea are normally evidenced in the bill of lading issued to you by the shipowner. Remember, this is a very important document as it is title to the goods, a receipt for them as well as evidence of-the contract of carriage and it is quasi-negotiable (see Section 6).

Because of the onerous nature of bills of lading, some shipowners today are trying to replace them by 'liner waybills' or 'data freight receipts'. Neither of these two documents is a document of title; under them the shipowner can deliver the goods to the named consignee merely on evidence of identity rather than on the production of an original document of title.

You will readily see that the shipowner cannot sit down and negotiate individual transport contracts with all traders wanting to send goods by any of his ships. Time just does not permit. To get over this, the shipowner publishes details of his contract conditions on his contract documents or advises shippers of where such contractual details may be examined (the latter in the case of short-form bills of lading - see later).

You may think, therefore, that nobody is looking .after your interests as a user of shipping. Fortunately, this is not the case as, legally, the shipowner has to guarantee to act in prescribed ways for your benefit under international conventions. These conventions are usually incorporated into national legislations and, consequently, form part of the contract of carriage through the 'law of the contract clause'.

Now, how did all this come about? Well, in 1921 the International Law Association met in The Hague and produced what became known as the 'Hague Rules'. These rules impose upon shipowners responsibilities to shippers which they cannot lessen. For example, they must use due diligence to provide you with a seaworthy ship; properly man and equip the vessel; load, stow, look after and discharge your goods; provide you, at your request, with a bill of lading; and they have to accept maximum limits of liability for damage to or loss of your goods through their negligence.

These rules existed for several decades but were revised by what is known as the Brussels Protocol of 1968 which updated the Hague Rules. The Developing Countries considered the revised rules - which became known as the Hague-Visby Rules - as too strongly favouring the carrier. Because of this the United Nations Commission on International Trade Law revised the Hague-Visby Rules at a diplomatic conference held in Hamburg in 1978. The Hamburg Rules tend to benefit shippers and consignees rather than carriers, but they are not yet in force anywhere as they have not been accepted by the required number of countries.

69

Briefly then, as a shipper your interests are protected by an international convention which will be incorporated in the contract of carriage, sometimes called the contract of affreightment. The shipowner's duty is to provide a seaworthy ship, look after your cargo and agree a maximum financial liability in the event of his negligence.

This maximum financial liability is laid down in the Hague-Visby Rules, for example, as an amount not excenling 666.67 units of account per package or unit, or two units of account per kilogramme of gross weight of the goods lost or damaged, whichever is the higher. The units of account are the Special Drawing Rights of the International Monetary Fund.

This may sound quite complex to you. What is important is that you should be well aware of your carrier's maximum liability and be certain that it would cover the value of your goods in the event of carrier negligence. If you are shipping goods of a value higher than that of your carrier's maximum liability, you should come to a catisfactory agreement with the shipowner regarding liability. The nature and value of such goods must be declared before shipment and inserted in the bill of lading. This might well mean paying a higher rate of freight, i.e. an ad valorem freight rate.

Secondly, you should be aware of what consitutes a package or unit. For example, is a container the package or are the packages inside a container the *packages or units' for which maximum liability is accepted by the carrier? Obviously, this is of tremendous importancem you and you should take care in the preparation of bills of lading. A 'container of 150 typewriters' might prove legally to be a package, but a 'container of 150 packages each containing a typewrite? might well prove legally to be 150 packages or units and represent 150 times the liability as compared with the rust method.

As severe penalties exist under some legal systems for neglect to advise port authorities of the nature of hazardous goods, you should be well aware of the situation in Pakistan. You shouldlconsult the Karachi Port Trust or Dry Port Authorities. For documentation,. see Sectiom6.

Types of bills of lading

Incidentally,.you may come across these other types of bills of lading in the course of your trading:

Through bills - these are bills covering sea and other forms of transport through to inland destination:.

Container bills - these are invariably 'received for shipment' bills issued by container shipping lines to cover multi-modal transport from an inland container depot to final destination.

House bills —house bills are bills of lading issued by freight forwarders.

Groupage hills - bills issued by freight forwarders offering consolidation facilities.

Shortfornv bills - as mentioned already, these are bills which do not catty evidence of the contract of carriage but which state that contract terms may be seen at the offices of the shipowner or. his agents.

Dirty bills(Tour in the USA) - these are bills which bear superimposed clauses which expressly declare defective conditions of your goods and/or the packing.

Combined transport documents - these are documents of carriage relating to multi-modal transport_ A much-used example is the freight forwarder's FIATA Combined Transport Bill of Lading; (FIATA is the international association of freight forwarders).

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ACTIVITY 11 It is of vital importance that you understand the terms of the contract of carriage which you have concluded with the shipowner. These are evidenced on the back of a full bill of lading. The clause incorporating the specific international convention (the Hague or Hague-Visby Rules) is known as the 'clause paramount'. You should read all the conditions closely to understand your contractual relationship with the shipowner. Get hold of a bill of lading and look through the conditions.

8.2 Air transport

Just as with surface shipping there exist international conventions regarding the responsibilities of air carriers. Such a convention was signed in Warsaw in 1929 and subsequently amended by the Hague Protocol of 1955. Then there was a Convention in Guadalajara, Mexico, in 1961 which considered the responsibilities of the carrier even though the actual carrier (the airline) is not the party in contractual relationship with the shipper.

These international agreements establish the legal liabilities and relationships between air carriers and their clients (exporters, for example, such as yourself). Individual contracts of air carriage throughout the world relate to one of three situations: they can be subject to the 1929 Warsaw Convention, the 1955 amended Warsaw Convention, or be non-Convention. It is important that you know precisely your relations with an air carrier, so you are recommended to consult the airline or cargo agent each time you send goods by air so that you are aware of your carrier's responsibilities and liabilities in the event of his negligence.

The document of carriage issued under the original Warsaw Convention is an Air Consignment Note, and under the amended Convention it is an Air Waybill (see example overleaf). Neither document, unlike the bill of lading, is a document of title to the goods. The member lines of the International Air Transport Association issue a common form of air waybill and associated conditions of contract, but these in no way avoid the provisions of either the original or amended Convention.

For details regarding the transportation of dangerous goods by air you should refer to the sub-section on Dangerous Goods Notes in Section 6. Hazardous goods in air transport are rather more extensive than those listed as dangerous for surface movement, due to the pressurisation of aircraft and the effect certain goods can have on aircraft navigation equipment. You should consult your air freight agents or air carriers in good time for advice regarding documentation for restricted articles and radioactive materials.

There is a difference of some significance between the FOB (port) for shipping and FOB Airport which has the acronym FOA. You should note that under an orthodox FOB (port) contract in shipping the buyer names the ship and pays the freight charges. Under FOA you, the exporter, contract for the carriage unless your buyer advises you differently; you should consult your buyer about this, bearing in mind, of course, that he will pay the freight charges himself.

ACTIVITY 12 Just as with the carriage of goods by sea, the air transport document, the air waybill, evidences the contractual situation which exists between you, the exporter, and the airline, the carrier. Obtain an air waybill from the Pakistan International Airlines Corporation and study the contractual terms under which your goods will be carried.

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8.3 Road transport

If you use road transport for export purposes you will usually be in contractual relationship with a road service organisation or a freight forwarder. That is, of course, if you are not using your own road transport fleet Legally, therefore, you will need to be fully aware of the contractual situation and produce any documentation and information called for by the operators.

In many parts of Europe the international carriage of goods by road for reward is covered by a convention agreed in Geneva in 1956 by the Economic Commission for Europe (Tranvia Division). This convention, which deals principally with documentation for road trans's), t and carriers' liability, is known briefly as the Convention Marchandises Routiers with the acronym CMR. The document of carriage, not a title document, is the CMR consignment note.

A European agreement also exists on the international carriage of dangerous goods by road (known briefly as the ADR). It came into force in 1968.

The situation in Europe is mentioned to show that in one world region there are agreed regulations on international road delivery operations.

ACTIVITY 13 Ascertain the legal liability of road hauliers in Pakistan for damage to or loss of cargo through their negligence. You should consult the road hauliers you customarily employ.

If you decide to deliver goods internationally by means of your own road vehicles it is essential for you - and your road service organisation or freight forwarder - to ensure that:

• You comply with the domestic laws of the countries tluough which your vehicles travel, for example, on taxation, vehicle weights and dimensions, vehicle construction and condition, insurance, speed limits and conditions relating to drivers.

• You comply with regulations regarding the movement of commercial vehicles on special crrqsions, for example, public holidays and religious festivals.

• You have a licence or permit to operate in each country your vehicles enter if such licences or permits are legally required. Bilateral road haulage agreements are in force between certain countries.

• You adhere to customs requirements and documentary regulations in connection with your vehicles as well as the cargoes.

You comply with any dangerous goods regulations which exist.

• You use appropriate vehicles for perishable commodities.

International driving licences are held by drivers when necessary.

• You are aware if regulations exist in countries through which you will operate which apply specifically to companies using their own vehicles for delivering goods rather than those of professional hauliers.

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8.4 Rail transport

You will not be surprised to learn that in Europe there is also a convention which controls the international delivery of goods by rail. This convention was signed at Beme on 9th May 1980 and is known as COITF, the Convention Relatif aux Transports Internationaztx Ferroviaires. Parties to this convention are not restricted to European countries for they include some from Africa and Asia.

ACTIVITY 14 Contact your nearest railway goods depot and obtain any literature they produce on the intemationafdelivery of goods by rail. Read the literature with the idea of ascertaining the contractual conditions which would exist between you, the exporter, and Pakistan Railways, the carrier. It is always important to know exactly the terms under which your goods are being carried.

COTIF covers the conditions and performance of the contract of rail carriage, the recommended consignment note, carriers' liabilities, the carriage of dangerous goods, etc.

8.5 Containerisation

The international transport of goods by container can be a multi-modal form of delivery as more than one form of transport can be used for sending goods from you to your customer, i:e. a permutation of sea, air, road and rail. Because international conventions do exist which offer varying maximum liabilities for each form of transport, problems exist which-have not yet been resolved satisfactorily from the legal point of view.

Take the situation where you send a container of your goods by rail to a seaport, by sea from there to Australia, by air from the Australian seaport to an inland destination, and then by road from the airport to your customer' premises. If when the container is unpacked your goods are found to be damaged, on which part of the route did the damage occur? This is important, because different carriers' liabilities apply to each method of transport But it would be very difficult to discover and prove where the damage took place.

An International Chamber of Commerce initiative has produced a publication entitled The Uniform Rules for a Combined Transport Document. This is ICC Publication No.298 and you should be able to obtain a copy from your Pakistan National Committee (see Section 10). The rules expressed may be adopted contractually between you and your carrier and thus relieve you of multi-modal transport problems.

8.6 Post

You will find that if you export by mail, several types of postal services will be at your disposal: letter packets, small packets, printed papers, parcels - by surface and by air services. Each service has its own size and weight limitations and regulations exist regarding accompanying documentation, including customs declarations, invoices, certificates of origin, etc. The simplest thing for you to do in this case is to carry out yet another activity.

ACTIVITY 15 Obtain from your nearest main Post Office the regulations for and details of exporting goods from Pakistan by postal services and study the contents.

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8.7 Summary

Goods can be transported internationally in a number of ways: by ship, aircraft, road, rail or post.

There are legal implications with each method, for the carrier is required to be in contractual relationship with the exporter.

Legally, the interests of exporters are looked after by international conventions which are customarily incorporated into national legislations.

In shipping, evidence of the contract is printed on the back of the full bill of lading. The bill of lading is also a title document and a receipt for the goods.

Numerous types of bills of lading exist, as indicated in sub-section 8.1.

In aviation, the contract of carriage is evidenced by the air waybill. The air waybill is a receipt for goods but is not a document of title.

Documents for road and rail transport are consignment notes, which are receipts for the goods but, again, are not documents of title.

Care should be taken regarding the transport of hazardous goods as these can endanger life and property and affect navigation.

If you export by road using your own vehicles you must abide by the relevant legislation of the countries in or through which your vehicles travel.

The international transpuit conventions each lay down carrier liability in the event of carrier negligence. As this differs with each form of transport, the liability problem becomes difficult in containerisation which frequently uses more than one transport form. In this connection, the ICC has produced Uniform Rules for a Combined Transport Document. These rules may be adopted contractually.

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Self-assessment questions

Try out these questions and check back in Section 8 if you have difficulty.

(a) What are the three principal characteristics of a bill of lading?

(b) How are your interests as an exporter taken into consideration in contracts of international carriage of goods?

(c) What is meant by 'through', 'short-form' and 'dirty' bills of lading?

(d) Why iS the list of dangerous goods for air carriage more extensive than that for sea transport?

(e) Who contracts for carriage under FOB and FOA terms?

(f) What is the essential difference between bills of lading and air, road and rail transport documents?'

(g) How can you resolve the problem of varying carriers' liabilities with container movements?

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9 Other legal aspects of the export contract In my opinion there are three other aspects of an export contract of which you should be aware as an export executive: the difference between arbitration and litigation in the event of contractual disputes; the situation regarding protection of industrial property by trade marks, patents and copyright; and the ever-present problem of product liability. Most exporters at some time or other experience problems in these areas and need to be aware of them. The following notes should help.

9.1 Arbitration v. litigation

Arbitration is described by the International Chamber of Commerce in its Introduction to ICC Rules on International Contracts (ICC Publication No.365) as 'A means by which contract disputes may be settled by a private procedure agreed on by the parties, rather than by the courts. The parties concerned agree to be bound by the arbitrator's decision, which has the force of law and may be executed in a way similar to a court award.

With the growth in the volume and complexity of international trade of all kinds, and the consequent increase in the number of contracts that escape from the confmes of any single legal system, arbitration has today become a prime method of settling international commercial disputes.'

In simple terms, your international contract disputes can be resolved by businessmen who understand the practicalities of export trading as well as by the judiciaries of the countries whose law is controlling the contracts concerned. In order to have recourse to arbitration you must obtain the consent of your buyer and, preferably, have such consent incorporated in an arbitration clause in your contract of sale.

In 1985 the United Nations Commission on International Trade Law (UNCITRAL) prepared and adopted a Model Law on International Commercial Arbitration for countries to follow as a pattern for their legislation. So in the future there could be some international standardisation on this subject

The most well-known court of arbitration is that of the International Chamber of Commerce, but there are many others including the London Court of International Arbitration, the American Arbitration Association and foreign trade arbitration commissions of the State-planned economies.

At one time it was considered that exporters might prefer arbitration rather than recourse to the courts as it was often cheaper, speedier and resulted in little publicity. However, you will be interested to know that, today, international trade lawyers are saying that arbitration and litigation each have their relative merit and that you should seek specialist advice on the subject.

The chief objection to arbitration is that it does not createprecedents. Because of this, similar cases keep having to be arbitrated. Lawsuit judgements usually remain to provide case law and give legal stability on situations until, if ever, they are overturned. So here is an instance where you should consult your legal advisers about the appropriate clause for your international contracts of sale.

However, it must always be emphasised that the best way to resolve differences between buyers and sellers is by mutual compromise and placation of the customer. Nobody wants disagreements. The important thing is efficient, successful and profitable trading. Only at the last resort should the question of arbitration or legislation ever be considered.

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9.2 Protection of industrial property

You will probably require to retain control over your products in other countries through the medium of trade marks, patents and designs. These are collectively known as industrial property.

The legal history is that an International Convention for the Protection of Industrial Property was concluded in Paris in 1883 and frequently revised ever since. Pakistan is a Convention country. The Convention is administered by the World Intellectual Property Organisation (WIPO) in Geneva, which also administers the International Union under the Berne Copyright Convention.

Registration.of or claims to your trade marks, patents or designs should be undertaken through the specialist official organisations (for example, the Patents Office and Trade Marks Registry in the United Kingdom) in the countries where you wish to trade. As far as these countries are concerned, you can make application for your protection there when you register your trade marks, etc. in Pakistan. Alternatively, you can make a Convention application, if the countries to which you wish to export (like Pakistan) are members of the International Convention.

As this is a most important aspect of your trading,abroad, it would be wise to consult either your lawyers or the Pakistan Trade Marks and Registration Office in Karachi (Ministry of Commerce).

9.3 Product liability

This is an area of international trade law of which you should be well aware but never consider yourself an expert. It is a complex subject and needs legal explanation by your professional advisers. If you are held liable for injuries caused by defects in your products you could find yourself exposed to very heavy damage awards. Because of this, insurance against product liability claims can be very expensive.

There are varying legal approaches to the subject in different parts of the world. In United States law a producer can be adjudged liable for injuries caused by his products under what is known as the principle of absolute liability and juries can award immense sums in damages. Under English law there is more concern about the producer being negligent in the manufacture of the product. A directive issued in July 1985 by the Council of Ministers of the European Economic Community lists seven situations as a result of which producers are not liable.

Two examples will suffice to show you just how important the subject is. Imagine, for example, if you are a manufacturer of pharmaceuticals and your products cause ill effects to consumers. In this connection, you should note that product liability can include defective labelling or other presentation of your product. Secondly, imagine you are a manufacturer of machine tools and operation of one of your machine tools results in physical harm to a factory operative. In this case, defects in operating instructions may well be considered.

To sum up, product liability is an ever-present hazard for manufacturers; large damage awards can be made against producers; the law is complex; and insurance can be expensive. You should be ever-conscious of the situation and take professional advice if you deem, it necessary.

Finally, I would like to wish you well in your endeavours. The law is there to protect you - and others. If you keep the points given here in mind and take good advice you stand every chance of success.

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Self-assessment questions

(a) What is the preferential approach to customer complaints rather than going to law or arbitration?

(b) You will require to ensure retention of your industrial property in your goods, i.e. by patents, trade marks, designs and copyright in your international trading. What is the organisation in Pakistan which will advise?

(c) What are the possibilities of your particular products causing harm to your buyers or consumers? Do you regard this as a likely risk?

(d) In the event of your considering product liability a danger in your international trade operations, how will you proceed to have the risk under control?

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10 Some recommended publications General

Clive M. Sehmitthoff (1986), Schmitthoff's Export Trade - the Law and Practise of International' Trade (eighth edition), Stevens & Sons Ltd., London.

G.H. Sharman (1978), Thinking Managerially - about Exports (second edition), Institute of Export, 64 Clifton Street, London EC2A 4HB.

Export, the journal of the UK Institute of Export (see above), issued 10 times annually.

Distribution;

C.M. Schmitthoff (1980), Agency Agreements in the Export Trade, Institute of Export, London (see above).

Commercial Agency (1983), Publication No.410 of the International Chamber of Commerce;,Paidstan National Committee, 10th floor, Adamjee House, I.I. Chundrigar Road, Karachi. (Telephone: 222655; Telex 25770 GVTC PK).

Contracts ;of sale

Legal Aspects of Export Sales (third edition) (1978), Institute of Export, London (see above). Note: Professor Schmitthoff is currently preparing a fourth edition.

Incoterms 0980 edition), Publication No.350 of the International Chamber of Commerce..

Guide to Incoterms (1980 edition), Publication No.354 of the ICC.

Force Majeure and Hardship (1985), Publication No.421 of the ICC.

Guide to the Prevention of Maritime Fraud (1985), Publication NoA20,of the ICC.

Introduction,to ICC Rules on International Contracts (1981), Publication No.365 of the ICC.

Delivery

Incoterms and Guide to Incoterms (1980 edition) (see above).

Export finance

Uniform Rules for Collections (1978), Publication No.322 of the ICC.

Uniform Customs and Practice for Documentary Credits (1983), Publication No.400 of the ICC.

Managing Exchange Rate Risks (1985), Publication No.422 of the ICC.

Letter of Credit Checklists (1984), for exporters, export sales executives and for export customers, published by the Simplification of International Trade Procedures Board, Almack House, 26 King Street, London SW1Y 6QW.

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Export documentation

Croner's Reference Book for Exporters (constantly up-dated), published by Croner Publications Ltd., Croner House, 173 Kingston Road, New Malden, Surrey KT3 3SS, United Kingdom.

Cargo insurance

Dennis Badger and Geoffrey Whitehead (1983), Elements of Cargo Insurance , Woodhead-Faulkner Ltd., 17 Market Street, Cambridge CB2 3PA, United Kingdom.

International transport

Alan E. Branch (1977) The Elements of Shipping, Chapman & Hall, 11 New Fetter Lane, London EC4P 4EE, United Kingdom.

The Problem of Clean Bills of Lading (1974), Publication No. 283 of the ICC.

Uniform Rules for a Combined Transport Document (1975), Publication No.298 of the ICC.

Merchants Guide to Liabilities and Documentary Problems (1984, but new edition in course of production), published by P & 0 Containers Ltd.

Arbitration

Guide to Arbitration (1983), Publication No.382 of the ICC.

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